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Mr. Nadeem Ilahi, Mrs. Armine Khachatryan, William Lindquist, Ms. Nhu Nguyen, Ms. Faezeh Raei, and Jesmin Rahman
In the past 25 years, exports have contributed strongly to growth and economic convergence in many small open economies. However, the Western Balkan (WB) region, consisting of small emerging market economies, has not fully availed itself of this driver of growth and convergence. A lack of openness, reliance on low value products, and weak competitiveness largely explain the insignificant role of trade and exports in the region’s economic performance. This paper focuses on how the countries in the WB could lift exports through stronger integration with global value chains (GVCs) and broadening of services exports. The experience of countries that joined the European Union in or after 2004 shows that participation in GVCs can help small economies accelerate export and income growth. WB countries are not well integrated into Europe’s vibrant GVCs. Trade within the region is also limited—it tends to be bilateral and not cluster-like. Our analysis shows that by improving infrastructure and labor skills and adopting trade policies that ensure investor protection and harmonize regulations and legal provisions, the region can greatly enhance its engagement with GVCs. Services exports are an increasingly important part of global trade, and they offer an untapped source of growth. The magnitude of services exports from the WB region compares favorably with that of peers in Europe, particularly in travel services where several of these countries have a revealed comparative advantage. But there is significant room for growth in tourism exports and an untapped potential in business and information technology services exports that these countries can materialize through policy efforts that increase openness and enhance connectivity and labor skills. Serbia offers a good example of how decisive efforts, including education policies to ensure a sustained supply of skilled labor, can help information technology services exports to take off.
International Monetary Fund. European Dept.
This Selected Issues paper analyzes export competitiveness in the Former Yugoslav Republic of Macedonia (FYR Macedonia). Export performance in FYR Macedonia has been strong over the last decade, critically contributing to overall growth. Exports have been re-oriented toward new products with higher technological content, allowing for the build-up of revealed comparative advantages in these products. The analysis based on Constant Market Share analysis shows that the overall competitiveness gap of FYR Macedonia with respect to other emerging European countries has narrowed. There appears to be significant room for quality improvement, including for the most successful export products. Although the contribution of exports to GDP growth has been significant, spillover into the domestic tradable sector from the foreign investment led export sector remains limited so far.
International Monetary Fund. European Dept.
This paper discusses Serbia’s First Review Under the Stand-By Arrangement. The program is broadly on track. All end-March 2015 performance criteria and indicative targets were met with comfortable margins. All end-March structural benchmarks were implemented, although with a delay, and all prior actions were met. The economy has stabilized, on the back of lower oil prices and stronger than expected trading partner growth. Inflationary pressures remain subdued. The external position has strengthened. Despite monetary easing, credit growth remains sluggish, and nonperforming loans continue to pose a challenge. Risks to the program come from possible spillovers from regional developments and increase in market volatility, as well as delayed implementation of structural reforms.
Jiri Podpiera
Emerging markets are particularly vulnerable to boom-bust credit cycles, due to excessive capital flows, shallow equity markets, and companies' high leverage and open FX positions. While the policy debate on how to respond to boom-bust credit cycles remains unsettled, it has been conjectured that credit subsidies may provide a particularly effective policy tool to counter a credit bust. This paper reports on a rare policy experiment where credit subsidies were used to buffer the impact of the global financial crisis on Serbia in 2009. Model simulations suggest that credit subsidies in Serbia helped to mitigate the slump in output.
International Monetary Fund
During the twin crises of 2008–09 Georgia’s foreign exchange reserves have been exposed to a number of external and internal drains. Its exports declined by 21 percent from peak to trough. Bank deposits declined by more than 20 percent in late 2008–early 2009, while deposit dollarization increased sharply. FDI declined from 16.4 percent of GDP in 2007 to an estimated 5 percent of GDP in 2010. Georgia was able to limit the impact of these drains on its international reserves.
International Monetary Fund
This Technical Note reviews banking sector soundness and stress testing in Serbia. Serbia’s banking sector is well capitalized and liquid, but the corporate sector’s weak performance is a source of concern because of its adverse impact on nonperforming loans. Stress tests indicate that banks are quite resilient to further adverse shocks, but they remain vulnerable to credit risk. The results highlight that the banking system is most vulnerable to further exchange rate depreciation, through foreign currency induced credit risk, and a prolonged economic downturn.
International Monetary Fund
This Selected Issues paper for Bosnia and Herzegovina (BiH) reports that GDP per capita in BiH is similar to that in neighboring Balkan countries. BiH risks are falling behind rather than catching up with other transition economies in terms of its economic development. This could delay the process of convergence to and integration with the European Union, including its ambitions to eventually adopt the euro. Accelerated structural reforms and macroeconomic stability remain key to achieving higher and sustained growth rates.