the european union integration worked consciously to induce a level of economic integration in europe that would induce conditions that more closely met the economist's test for an optimal currency area. for most of the emerging markets today, in contrast, the challenge is to establish the conditions that will enable them to live more comfortably in a world where their exchange rates will adjust more freely in response to changing fundamentals. as these economies become more open to capital flows, they will necessarily find it more difficult to occupy the tenuous middle ground with an exchange rate regime that is neither fully fixed nor flexible, but managed in a way that closely tracks the value of the dollar or carefully constrains fluctuations against the dollar. this does not mean that these countries can be indifferent to exchange rate movements or that the exchange rate is irrelevant to the conduct of monetary policy. for many small open emerging economies, price stability and exchange rate stability are obviously intertwined, and a monetary rule that responds effectively to inflation pressure cannot afford to overlook the signals coming from the foreign exchange market. but attempts to target a particular level for the exchange rate or the slope of the change in the rate in response to different conditions will, as the capital account becomes more open, inevitably, come with substantial risks to monetary and financial stability. managing the transition to a more open capital account and a more flexible exchange rate regime is not a simple task. these transitions need to be handled with care and attention to the development of a strong institutional framework for monetary policy and the financial system. the more successful transitions came in contexts where the monetary authorities were independent of political constraint, where balance sheet problems and currency mismatches in the government and the financial system were not acute, where the prevailing legal framework provided reasonable protections for property rights and the enforcement of contract, and where there was effective supervision of the banking system. where these conditions were weaker, the transitions from fixed exchange rate regimes were more traumatic. these conditions seem exacting, and the understandable need for caution often is invoked in defense of protracted and very gradual transitions. a certain degree of caution is wise : there is a great deal of risk in a poorly managed and premature shift toward flexibility. but there is risk in gradualism too. delay magnifies the costs of living with the distortions caused by a managed rate. once relaxed, exchange and capital controls are both difficult and costly to reintroduce, and even relatively modest steps back from an open regime can be damaging to confidence and credibility, without buying

tolerance band. it is a fact that by placing inflation under control we have restored confidence in the monetary policy, which now makes it easier for us to achieve results. anchored inflation expectations enhance the efficiency of monetary policy and, by extension, the economy ’ s resilience to external shocks. in our february projection as well, inflation will remain stable in the coming period and will approach the target midpoint gradually, though it will most probably stay slightly below the midpoint until the end of the projection horizon. chart 1 inflation movements and inflation expectations of the financial sector chart 2 inflation projection ( y - o - y rates, in % ) ( y - o - y rates, in % ) 6y average inflation = 1. 9 % 6y average core inflation = 1. 7 % 2. 0 1. 9 1. 1 - 1 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 cpi core inflation * sources : sors, nbs calculation and bloomberg. * cpi excluding food, energy, alcohol and cigarettes. inflation expectations 12 3 12 3 12 3 12 3 - 2 source : nbs. acceleration of economic growth in serbia is led by investment, exports and sustainable consumption. the economic growth in 2019 exceeded our initial projections, which we revised upwards in the course of the year. according to our latest estimate, it amounted to 4. 2 %. economic growth accelerated significantly in h2, reaching, in our estimate, 6. 1 % y - o - y in the last quarter. in the past half - decade, serbia has been characterised precisely by the growth led by investments. their impact on economic activity is unambiguously evidenced by the data on fixed investment growth at an average annual rate of around 10 % during this period, whereby their share in gdp increased to around 24 %. let me reiterate that fixed investments increased cumulatively in the past two years by close to 35 %, accounting for three quarters of serbia ’ s economic growth. an increase in their share to around 24. 5 % of gdp is expected this year as well, guided by continued implementation of infrastructure projects and private sector investment. chart 3 imf gdp growth projection for 2019 chart 7 fdi structure by sector ( in % ) ( in % ) april 2018 otober 2018 april 2019 october 2019 actual 2005 – 2008. euro area 2009 – 2012. serbia sources : imf and nbs estimate. source : nbs. 2018 – 2019. 2013 – 2017. construction and real estate finance