For years, Serbia has relied on state infrastructure projects and inflows of foreign direct investment (FDI) as the main drivers of economic growth – a model that now appears to have reached its peak. Under such circumstances, an old problem of the domestic market is once again coming to the fore: private capital from Serbia is investing too little.
According to preliminary data from the Statistical Office of the Republic of Serbia, gross fixed capital formation grew by only 0.9 per cent in real terms in 2025, a serious slowdown compared with growth of 9.2 per cent in 2024, emphasises Associate Professor Svetozar Tanasković of the Faculty of Economics. “The investment cycle that pushed our economy forward for years is clearly losing momentum.”
He points out that the structure of these investments by sector reveals the vulnerability of the current model: on average during the 2021–2023 period, the state accounted for around 42 per cent of total gross fixed investments, foreign investors around 22 per cent, while the domestic private sector contributed only 19 per cent. In practice, this is only slightly more than households (around 17 per cent, most of which relates to residential construction).
Gross fixed investments
“In other words, the state – directly and through foreign investments it actively encourages – created around two-thirds of total investments, while domestic entrepreneurship accounted for less than one-fifth,” Tanasković told Bloomberg Adria.
As he adds, this already unbalanced picture worsened further in 2025. Budget investments by the Republic in infrastructure declined nominally for the first time in several years (by around two per cent compared with 2024), while FDI suffered a dramatic drop (gross FDI inflows in 2025 fell by roughly one-third compared with the previous year; according to data from the National Bank of Serbia, net FDI in 2025 declined by as much as 50 per cent year-on-year).
Net FDI inflows into Serbia by year
The construction sector was particularly volatile. During the first three quarters it recorded a decline of more than 10 per cent (due to delays in public infrastructure projects), only to achieve an unusually high year-on-year growth of 10.6 per cent in the fourth quarter, when the state allocated as much as €1.5 billion for infrastructure works in a single quarter, Tanasković stresses. “Such fluctuations illustrate how dependent the stability of economic activity has become on the pace of state budget execution.”
Lazar Šestović, Senior Macroeconomist for Serbia at the World Bank, cites numerous factors limiting domestic private investment: from the tax system, access to land, and the cost of capital and borrowing, to underdeveloped financial instruments.
“There is another issue worth mentioning – logistics, namely export costs. Domestic investors often invest with the idea of exporting at least part of their production, and then questions arise regarding the functioning of the railways, border crossings, delays and inspections, and infrastructure quality, where you have to pay fairly substantial insurance costs for your goods,” he points out and adds: “Then there is access to utility services, which is often almost impossible in many municipalities attractive for investment. You may have a surplus labour force in some underdeveloped municipalities, but no water supply, sewage system, or sufficiently strong electricity network. By the time all that is resolved, time has passed and your investment loses its justification. Quite simply, there are numerous factors – from the local to the international level.”
He recalls that this situation has persisted for years. “Since around 2010, we have had by far the lowest share of domestic private investment in GDP in the whole of Eastern Europe. Our investors are increasingly investing in neighbouring countries, which is paradoxical, but they simply cannot overcome all the challenges they face here.” On the other hand, he underlines that there is significant economic potential if these investments were revived. However, this would require serious work, and Šestović assumes there would be a need for some form of council or body dedicated to the issue – regularly reviewing, analysing, and considering what could be done to assist domestic businesspeople.
“There is no single key problem; all these obstacles must be addressed simultaneously because we have so many long-standing difficulties that people have become discouraged and believe they will never be resolved,” Šestović assesses.
Tanasković says that the fundamental issue is the quality of economic institutions, in other words the rules of the game under which businesses operate. As one mechanism, he cites the risk of rules changing during the game itself, where entrepreneurs cannot be sure that, once they invest, they will not face regulatory changes, retrospective interpretations of laws, indiscriminate inspections, or ad hoc administrative measures. “An indicative example from the recent period was the introduction of retail margin controls in autumn 2025: businesses entered the market under one set of rules, and then the market was temporarily suspended for them. The reaction was a reduction in activity and layoffs, which was an expected rational response.”
Tanasković also points to a paradox – even the local IT sector, which by its nature should be a generator of start-ups and creative destruction, shows signs of the same blockage. “The domestic segment of the IT sector accounts for around 85 per cent of the total number of companies, but generates less than one-third of revenues and employment. There is almost no productivity growth or serious investment in research and development. In the latest issue of the Quarterly Monitor economics magazine, which tracks economic trends and policies, we recorded that ICT sector growth in the fourth quarter of 2025, at 4.3 per cent, was the lowest quarterly growth in that sector since 2015.”
Asked what steps would in principle be needed to remove the obstacles mentioned and why private-sector investment is not being encouraged more intensively, Tanasković responds that, technically speaking, the recipe is already known and elaborated in numerous documents by domestic and international institutions: strengthening the rule of law, fair competition, transparency in public procurement, depoliticising regulatory and judicial bodies, implementing a serious anti-monopoly policy, and creating a predictable tax and regulatory framework.
“Without fair rules of the game and a depoliticised regulatory framework, the domestic private sector will remain confined to low-technology activities and defensive business practices, with investments only slightly greater than household residential construction,” he adds. If this space were opened up, however, he believes there are sectors with real potential. The IT sector is the most obvious, but its full development requires not only better institutions, but also a more developed domestic capital market and a venture-capital ecosystem, which practically does not exist here.
(Bloomberg Adria, 25.05.2026)