NATIONAL BANK OF SERBIA
Introductory speech
Inflation Report - February 2022
Tabaković, Governor
Dr Jorgovanka
Belgrade, 18 February 2022
Ladies and gentlemen, esteemed members of the press, dear colleagues,
Welcome to the presentation of the February Inflation Report. We will give you an overview of recent
economic trends, our new macroeconomic projections, as well as monetary policy decisions made in
the period since the previous Report.
Since our last meeting in November, the global economy has been marked by geopolitical tensions,
deepening energy crisis and further growth in cost-push pressures on a global scale. In addition, we
are faced with persisting problems in global supply chains and the spread of the Omicron variant, to
which the leading world economies reacted differently. All of this has led to additional mismatches
between demand and supply and to new inflationary pressures globally. Energy and food prices
recorded a sharp rise worldwide. Unlike in the previous crises, besides oil prices, the prices of gas and
electricity also recorded robust growth in international commodity exchanges. Global strengthening
of cost-push pressures and the spread of the Omicron variant in our key foreign trade partners led not
only to the upward revision of inflation projections, but also to a slowdown in economic activity and a
downward revision of GDP growth projections.
Despite unfavourable circumstances in the international environment, the NBS kept its November
projection of real GDP growth for this and the following years. In 2022, as well as in the medium run,
GDP growth is expected at 4.0-5.0% range, with the central projection in all years measuring 4.5%.
Overall risks to the projection are judged to be symmetric and, as so far, those from the international
environment being tilted to the downside and those from the domestic environment to the upside,
including primarily government investment and better results in attracting FDI inflows. Besides, it will
be easier to achieve the 2022 projection as we are building on excellent trends from the last quarter
of the previous year, in which, despite the slowdown in the euro area, Serbia recorded real GDP growth
of 6.9% y-o-y or 1.6% s-a relative to Q3 2021. This was largely a result of the record level of government
investments, but also FDIs, whose inflow in 2021 reached EUR 3.9 bn and thus surpassed the record
high from pre-pandemic 2019.
Over the past few weeks, we have had the opportunity to see that, contrary to the earlier expectations
of market participants, y-o-y inflation in most advanced and emerging economies increased further.
Euro area inflation rose from 5.0% in December to 5.1% in January, reaching double-digit levels in some
members. Although this does not, at first glance, confirm the assessments of leading central banks
about the temporary nature of current inflation, one should bear in mind that in most countries
inflation is still largely driven by rising energy and food prices. Also, there are countries that are faced
with high core inflation, both due to the strengthening of depreciation pressures on their national
currencies, and the overheating of their economies in the pre-pandemic period.
As for inflation in Serbia, according to our new projection, we expect y-o-y inflation in Q1 2022 to move
around the December level of 7.9% or slightly above it, and then to decline from Q2 onwards and settle
in the range from 3.5% to 4% at year-end. Going forward, it is expected to slow down further and move
around the target midpoint until the end of the projection horizon. The effects of the new agricultural
season will contribute the most to the slowdown in inflation, as they will directly affect the prices of
fruit and vegetables, and through lower production costs, the prices of processed food as well. We
expect that the gradual exit from the pandemic will help reduce the supply-demand gap globally and
solve the problem of halts in supply chains, which could, consequently, lead to lower cost-push
pressures. An important factor of lower inflation will be the expected subsiding of cost-push pressures
on account of the prices of oil, gas, electricity and primary agricultural commodities, according to
futures, as well as the drop-out of last year's hikes in petroleum product prices from y-o-y calculations.
As any other projection, this projection carries its own risks, which are associated mostly with the
international environment and are slightly skewed to the upside. My colleagues will explain them in
more detail later on.
Chart 1Inflation projection
(y-o-y rates, in %)
10
9
8
7
6
5
4
3
2
1
0
-1
12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12
2019 2020 2021 2022 2023
Source: NBS.
Amid stronger cost-push pressures and the need to impact inflation expectations and prevent the
second-round effects of rising global food and energy prices on other products and services, the NBS
continued tightening monetary conditions. As a reminder, last October, the NBS began a cycle of
increasing the effective repo rate - the interest rate at which we have implemented repo transactions
for years, making the best use of the flexibility of our monetary framework. From October until today,
the effective repo rate was increased from 0.11%, as it was then, to 0.79%, where it stands today. The
increase in the repo rate so far is almost equivalent to three key policy rate hikes of 25 bp each. In
making these decisions, we made sure that our monetary policy is consistent with achieving price
stability in the medium term, and that financing conditions remain favourable from the aspect of
ensuring continued stable growth in credit and overall economic activity.
Chart 2 CPI movements in selected CESEE countries
(y-o-y rates, in %)
10
9
8.60 8.60
8.20
7.85
7.40
8
7
6.60
6.40
6
5.30
4.70
5
4
3.45
3
2
1
Poland
Romania Hungary Czech Republic Serbia
0
8 10 12 2 4 6 8 10 12 9 11 1 3 5 7 9 11 8 10 12 2 4 6 8 10 12 9 11 1 3 5 7 9 11 8 10 12 2 4 6 8 10 12
Inflation Core inflation Inflation target Tolerance band
Source: central banks of selected countries.
Core inflation, which is affected the most by monetary policy, moved within the target tolerance band
the whole last year - averaging slightly above 2%, while at the end of the year it measured 3.5%, which
is lower than in the majority of Central and Southeast European countries running the same monetary
policy regime as Serbia. The key reason for the lower core inflation in Serbia is the fact that we
maintained relative exchange rate stability, keeping not only core inflation under control but also
providing a key contribution to the maintenance of business, consumer and investment confidence,
which is the most important prerequisite for dynamic and sustainable economic growth. Coupled with
a robust and timely package of monetary and fiscal policy measures, it was preserved confidence and
production capacities that made Serbia achieve, despite unprecedented challenges, one of the best
results in Europe in terms of GDP growth, which amounted to 7.5% in 2021, and 6.5% cumulatively
during the two pandemic years.
Chart 3 Contributions to real GDP growth, expenditure side
Chart 4 Cumulative economic growth in countries of the
(in pp)
region in 2020 and 2021
(in %)
7.5
8
Serbia* 6.5
6
Romania 2.9
4.5 4.5 4.5 4.5
4.3
Poland 2.8
3.3
4
2.9
Hungary 2.3
2.1
2.0
1.8
2 Slovenia 1.8
Albania 1.8
0
Bulgaria 0.2
-0.7
-2 Slovakia -0.5
-0.9
-1.6
Change in inventories North Macedonia -0.7
-4
Net exports
Bosnia and Herzegovina -1.7
Government consumption
Gross fixed capital formation
-6 Croatia -2.2
Household consumption
GDP (in %)
Czech Rep. -2.2
-8
Montenegro -9.3
2011 2013 2015 2017 2019 2021* 2023*
-12 -10 -8 -6 -4 -2 0 2 4 6 8
Sources: SORS and NBS.
Sources: NBS projection and IMF WEO (October 2021 and January 2022).
* NBS estimate.
* SORS estimate for 2021.
Speaking of economic growth outlook and its drivers, let me present several data that did not get the
deserved attention in the public. Above all - exports which outperform our projections year after year.
In the last two years only, goods and services exports increased by over 20% - from EUR 23.3 bn in
2019 to EUR 28.6 bn in 2021, thus reaching 53.9% of GDP. Exports would have been even higher had
it not been for the problems in global production and transport chains. The major part were
manufacturing exports that reached EUR 19 bn, as well as exports of services in the most propulsive
segments of the economy, such as ICT, business, transport and tourist services.
The current account deficit ended 2021 at 4.4% of GDP, only slightly above the 2020 level, despite the
equipment imports reaching record high EUR 4 bn and despite the extraordinary energy imports by
year-end. This is yet another indicator proving that we are much better equipped for the challenges
that we are clearly bound to face throughout this year as well. Our increased resilience is also testified
by the record high level of the country's FX reserves. At end-2021 gross FX reserves amounted to EUR
16.5 bn, up by EUR 3 bn from end-2020, while net FX reserves in 2021 came at EUR 13.7 bn. Let me
share with you the information that at this moment our vaults hold close to EUR 2 bn in gold, whose
quantity is continuously increased, measuring 37.5 tonnes at the end of January. The reduced need for
external financing is evidenced also by the plans to reduce fiscal deficit and switch to a primary surplus
in 2024, and the fact that the share of general government public debt in GDP was put on a declining
path already last year, measuring 57.5% at end-2021 for the general government and 56.9% for the
central government.
Chart 6 Current account and FDI projection
Chart 5 Export of goods and services
(in % of GDP)
(in EUR bn)
15
30
10
25
5
20
0
15
-5
10
-10
5
-15
0
-20
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2019 2020 2021 2022* 2023* 2024*
Export of services Export of goods
Secondary income Primary income
Services Goods
Export of goods and services
Source: NBS.
Current account FDI
Source: NBS.
* NBS projection.
In 2021, for the seventh year in a row, the current account deficit was covered by net FDI inflow, which
is expected to continue in the years ahead. FDI inflow in 2021 amounted to EUR 3.9 bn, remaining
mainly channelled to tradable sectors. Private investment growth on the back of preserved confidence
and stable sources of financing, with the continued implementation of government-financed
infrastructure projects, will push the share of total fixed investment in GDP to 25% from the last year's
23.7%, and ensure its continued rise in the years beyond.
Favourable trends continued also in the labour market. The average formal employment in the private
sector in 2021 stood at one million and 670 thousand, up by almost 100 thousand compared to the
pre-pandemic 2019. The greatest employment gains were recorded in the sectors which are the most
important from the aspect of economic growth and development - manufacturing (34 thousand),
construction (15 thousand), and private sector services, such as ICT services, trade, transport, tourism
and catering. At the same time, the average wage in the Republic of Serbia increased by 18.5% in the
last two years, driven mainly by the private sector wage growth of 19.2%. The preserved labour market
in pandemic conditions and a further rise in employment and wages are the most significant source of
financing of personal consumption, which is expected to continue up on a stable and sound basis,
Chart 7 FDI composition by sector Chart 8 Formal employment in the private sector
(in EUR bn)
(12-month average)
4.5
1,800,000
Manufacturing
Trade
3.9
3.8
Finance
4
1,700,000
Construction and real estate
3.5
Other
Thousands
3.5 Tradable sector*
1,600,000
3.0
3
2.5
1,500,000
2.3
2.5
2.2
2.1 2.1
2.0 1,400,000
2
1.6
1.5
1,300,000
1.5
0.9
0.9 1,200,000
0.8
1
0.6
1,100,000
0.5
1,341,626 1,353,430 1,387,966 1,449,704 1,524,961 1,573,140 1,614,922 1,669,773
1,000,000
0
2014 2015 2016 2017 2018 2019 2020 2021
2014 2015 2016 2017 2018 2019 2020 2021*
Source: NBS.
* Industry, agriculture, transport and w arehousing, catering.
Source: CROSO.
contributing to economic growth. However, the growth in personal consumption is not expected to be
excessive or generating major inflationary pressures.
Thanks to the preserved trust and full financial stability, the financial sector has continued to provide
funding for new investment and consumption, thus supporting economic growth. In the past few years,
Serbia recorded almost double-digit growth rate in lending, more precisely 9.9% in 2021, financed to
a significant degree by the record high levels of FX and dinar savings of the private sector. The rise in
lending is also a result of increasingly better performance of the banking sector, evidenced by the high
capital adequacy and the share of NPLs which reached 3.5% in December, down by 0.7 pp from the
pre-crisis level at end-2019.
Chart 9 Interest rate movements
Chart 10 Lending activity to the non-monetary sector
(daily data, p.a., in %)
(y-o-y growth rates in %, excluding the exchange rate effect)
30
4.5
4.0 25
3.5
20
3.0
15
2.5
10
2.0
5
1.5
0
1.0
-5
0.5
Enterprises
-10
0.0
Households
2019 2020 2021 2022
Total
BEONIA -15
Key policy rate
Interest rate BELIBOR 1W
-20
Interest rate on deposit facility
2009 2011 2013 2015 2017 2019 2021
Interest rate on lending facility
Source: NBS.
Sources: Thomson Reuters and NBS.
Ladies and gentlemen, dear colleagues,
Let me repeat what I emphasised in the public many times before. Serbian inflation is currently
determined by energy and food prices. These are supply-side factors which can be impacted by
monetary policy measures only slightly or not at all. The NBS cannot reduce the global price of oil or
other energy products, nor can it impact the prices of all those agricultural products that are traded in
commodity exchanges. What the NBS can and does do is to prevent that the effects of these elevated
prices spill over, via inflation expectations, onto the prices of other products and services to a large
degree.
It is also important to point out that the President and the Government of the Republic of Serbia have
ensured that our country pays one of the lowest gas prices and that electricity hike for the corporate
sector, while relatively high, is still one of the lowest in Europe. The prices of basic foodstuffs were also
capped and some of the market segments responded favourably to commodity reserve interventions.
The Government's decision to cap petroleum product prices will also exert an important effect on
market developments.
On our part, by preserving the stability of the exchange rate of the dinar against the euro, we managed
to ensure that the spillover of growing import prices of energy and food to other prices is not
additionally heightened by the effects of dinar depreciation, as was the case in prior episodes of the
high growth of these prices. For the sake of comparison, during the previous crisis and the price shock
in the period from 2010 to 2012, the adverse effect of the price hike in the international environment
on Serbian prices was tripled, as a consequence of the strong depreciation of the dinar against the
euro. Let me simplify: two thirds of the problems with imported inflation we had struggled with from
2010 to 2012 originated from the dinar's depreciation against the euro, and only one third from the
price rise in the international environment. We have not allowed that to happen this time and, thanks
to that, we still keep core inflation under control, and indicators of business and investment confidence
at high levels.
Chart 11 Contribution of individual components to y-o-y rate of import price growth
(in pp)
21
Growth rate of import
rowth rate of import
18
prices in RSD
prices in EUR
15
12
9
6
3
0
-3
-6
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Import prices of other products Import prices of services Import prices of oil Import prices of food
Source: Destatis, FAO, Bloomberg, Eurostat, SORS and NBS calculation.
In the coming period we will continue to carefully monitor and assess factors in the domestic and
international environment, which will determine our future decisions and moves. You can rest assured
that the Serbian Government and the NBS will conduct a consistent and responsible economic policy,
doing everything in their power to see our economy grow even stronger and more resilient to future
challenges from the international environment. Medium-term price and financial stability remain the
NBS's priority, because that is the best way for the central bank to contribute to sustainable economic
growth and to a rise in employment and living standards.
I will now give the floor to my colleagues from the Economic Research and Statistics Department, to
give you a detailed account of our new projections.