Money Has Become More Expensive

Raising benchmark interest rates is a logical consequence of the intention to reduce the amount of money in circulation and, thus, inflation

Radojka Nikolić, Editor-in-chief of Biznis magazine and Ekonometar

We spoke with Radojka Nikolić, editor-in-chief of Biznis magazine and Ekonometar, about the subject of inflation as a current global phenomenon and its peculiarities in Serbia. 

We have to start with inflation. It seems that the situation has been out of control for quite some time now. 

Inflation has been the biggest global problem for two years now and we know how it came about – massive financial aid was disbursed to citizens and businesses in 2020 to help them overcome the pandemic, then broken supply chains in 2021, which brought about disrupted supply and demand, and finally, the Russian-Ukrainian conflict in early 2022 that caused a crisis in the energy and food supply. All these circumstances directly affected the amount of money that was in circulation and the global inflation that almost the entire world was facing. The fight against inflation started when the American FED and the European Central Bank raised their interest rates and for now, it is yielding results because inflation is decreasing in both Europe and the USA. But at the same time, the inflation has resulted in reduced production, because both corporate and retail loans have become more expensive. This is why the fight against inflation has been lasting for such a long time. We need to be persistent in lowering prices, but not stopping economic activity, i.e. avoiding a recession. That is why elastic adjustments are needed, a little tightening here, then a little loosening here so as not to stifle the economy and reduce the population’s purchasing power.

Serbia is one of the European countries with the highest price growth. Why is that so?

Yes, Serbia is one of the countries with the highest price growth in our region, because in June, for example, inflation was 13.7%, while, at the same time, inflation in the European Union in the same month dropped to 6.3%. Serbia has two problems. The first is that in 2023 and 2024, it has to increase the prices of energy sources – electricity and natural gas – as per the agreement with the IMF and that price increase is incorporated into all other prices. Another problem is that there are high retail margins, especially in the food sector, and that the agri-food sector is very dependent on weather conditions, which also determine food prices. Food and energy prices in Serbia have the greatest impact on inflation, which is still high, as it is in double digits.

Economic indicators are like facts – you can use them as you see fit

EU countries have recorded very significant and even surprising declines in inflation in the past year. For example, in July of last year, Estonia had inflation of 23.2% and in July, it was reduced to 6.3%. Or, Greece, for instance, had inflation of 11.3% a year ago and only 3.4% in July of this year, Spain, which reduced inflation from 10.7% in July last year to only 2.1% this year, Slovenia, which curbed its inflation from 11.7% in July last year to 5.7% this July, and so on. We must also mention neighbouring Bulgaria, which decreased its inflation from last year’s July 17% to the current 8.7%. But, there is one neighbouring country, which is an EU member, which is infamous for its inflation just like Serbia and that is Hungary, which has had double-digit inflation for more than a year. In June 2023, it was 19.9%, and in July 17.6%. It’s bad for both countries to have such high inflation, but our economic authorities have promised that we will have single-digit inflation by year-end. It remains to be seen.

Why are economic indicators interpreted in so many different ways and adapted to the needs of the person speaking about them? The government has its data which show that everything has been going great while the political parties in opposition dispose of disastrous data.

Economic indicators are like facts – you can use them as you see fit. You can take only the part that proves your point, and skip everything that doesn’t work for you in favour of what you want to prove. You can take only a piece, one month or one week for instance, which, for example, shows that a certain parameter has gone up, which, in turn, proves that there is economic growth. Or to take the moment when the state budget is brimming with the revenue from VAT and excise tax collection, because these are the main revenue sources that fill the budget, so you can say that you have a budget surplus. The public does not know that the state has not fulfilled its obligations towards the budget beneficiaries to whom it owes money and that there will be no surplus when all those owed by the state are paid. The only thing that the public hears is that there is enough money in the budget! By saying so, politicians achieve their goal – to show the public that they are successfully managing the economy and the state, which, by the way, is the dream of all politicians and their main occupation. Of course, they also want to stay in power as long as possible. If they show both sides of the coin, i.e. the good but also the bad sides of certain facts, maybe people will remember only the bad and that does not go in politicians’ favour. That’s how it was and will be. Politicians who pointed out the dangers lasted a short time and those who have been promising a better life and have been constantly leading the people towards it, last much longer.

Loans are becoming increasingly expensive. How much will this affect the growth or decline of the economy? This is best evidenced in the domestic real estate market, which is almost paralyzed due to more expensive loans. What is the situation with the business sector that is crying out for capital?

Yes, loans have become more expensive and they will be even more expensive next year because the European Central Bank’s benchmark interest rate will go up. It surpassed four percent in late July. Bear in mind that eight or nine years ago, Euribor was in the negative zone. The National Bank of Serbia’s benchmark interest rate stood at 6.5 percent in July 2023, while only two and a half years ago, in January 2021, it was one percent.

Loans have become more expensive and they will be even more expensive next year

Such an increase in the benchmark interest rate, that is the interest rate at which banks trade with each other, naturally raises overall interest rates. All the more so, as bank costs, fees and interest rates are added to that in accordance with the interest policy of each bank. Raising benchmark interest rates is a logical consequence of the intention to reduce the amount of money in circulation and thus inflation. As far as businesses are concerned, whoever needs money for development will have no problem getting it, if they are solvent. It’s just that money has become more expensive, as have the products manufactured by the business sector. It’s a closed circle. As for the banks, especially those that operate in Serbia, they will certainly not falter. The first six-month report for this year proves that – the net income from fees and interest rates of some banks jumped up to 80%. Namely, about 90 percent of loans in Serbia have a currency clause, which means that the loan instalment in Dinars increases as Euribor goes up. Although that is a burden for the debtors, because they have to pay more money for their loan instalments, it fills the banks’ coffers. Today, banks have more money than ever.

However, since it is not good for banks just to “sit on money”, but rather use it, this will force the bankers to lower interest rates in the coming period. You just have to wait. It happened in the past, so we will soon see a similar situation in our country too. Bankers worry when they are full of money, just as they worry when they have very little money.

Are you optimistic about the economic situation in Serbia this year? Is there anything encouraging to look forward to?

Of course, there is! The current crisis will not be too drastic for the Serbian economy. We have had worse days, but let’s not dwell on the recent and distant past. Of the positive things, there is certainly the circumstance that in 2023, we will achieve economic growth of two to three percent, which is better than being in a recession or having a negative balance. However, our main problem is that we cannot achieve high economic growth for a long period of time, which is necessary for Serbia to join the economically developed European countries. For example, it would be good if Serbia could sustain annual economic growth rates of seven percent for a decade. That would be a solution for Serbia and that is not even in sight yet. In late April this year, when I asked the director of the World Bank office in Belgrade, Nicola Pontara, when would Serbia bridge the gap with the developed European countries if annual economic growth rates are around 3 percent, he answered that, in that case, Serbia would reach the European level in 2070, i.e. have a living standard that is closer to that of the EU Member States. “If that growth doubles and amounts to 5% to 6% annually, then bridging the gap with the living standard in the EU would be possible even earlier, in 2040”, said Mr Pontara. I’m sure the World Bank has good approximations, but that doesn’t mean we should stop being optimistic.

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