The World Bank said on Tuesday it had lowered its forecast for the Western Balkans’ economic growth in 2019 to 3.2% from 3.5% predicted in April.
“Economic activity is slowing in the Western Balkans, as investments and exports continue to fade into six countries around the region,” the World Bank said in a press release following the presentation of its most recent Western Balkans semiannual economic report, autumn 2019.
Economic growth in the Western Balkans accelerated to 3.9% in 2018 from 2.6% in 2017. The World Bank noted that while the regional economy is forecast to grow in 2020 and 2021, it will remain slightly below the ten-year high of 2018.
According to Lazar Sestovic, World Bank chief economist for Serbia, the WB estimated slightly lower economic growth than originally expected due to the unfavourable situation in the global economy. The risks are high and he urges the state to take account of fiscal policy and to make reservations in order to maintain the benefits generated by fiscal consolidation.
Consumption continues to be the main driver of economic activity in Western Balkan countries, fueled by higher public spending and near double-digit growth in household lending. This raises questions about the sustainability of the consumption-driven growth in the region.
Growth is slowing despite a surge in public spending stimulated by cyclical revenues. The rise in revenues has not been enough to offset the rise in current spending dominated by public wages and social benefits. As a result, fiscal deficits are projected to go up in 2019 in all countries in the Western Balkans, except Kosovo and Montenegro.
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External imbalances also started to rise as exports slowed, due to falling demand from EU trading partners amid rising trade tensions. Sizeable internal and external imbalances in several Western Balkan countries, along with elevated public debt, expose the region to adverse economic shocks. The higher public spending has compromised an opportunity to build the much-needed fiscal buffers to be able to cushion the impact of rising external uncertainties.
All countries are projected to grow faster, except Montenegro, where the phasing-out of an investment cycle is projected to moderate growth. However, this positive outlook is vulnerable to mounting risks. The region faces rising uncertainty as economic growth slows globally, including in the EU— the Western Balkans’ major trading partner and source of financial flows.
Improving the efficiency and equity of public spending and strengthening revenue mobilization remains a priority in all Western Balkan countries. Public sector wage bills and pensions constitute the largest share of public spending in the region. Tighter controls on wage bills, reducing tax expenditures, and better targeting of social benefits would open space for more public investment, improve equity, and enable the build-up of fiscal buffers to mitigate rising risks.
This post is also available in: Italiano