Serbia: Major external account adjustment in H1
Overview:
The current account deficit is falling sharply. On current trends it will more than halve from 18% of GDP in 2008 to below 8% of GDP this year. The adjustment mechanism – a sharp import contraction – is painful but a reduction in external imbalances is long overdue. The capital account, having shown some fragility in the two preceding quarters, also started to stabilise in Q2. Hence, the balance of payments picture has now improved and this has halted downward pressure on the dinar and the level of foreign exchange reserves. However, structural reforms to improve the competitiveness of the export base are still necessary if the current account deficit is to remain at reasonable levels as domestic demand starts to recover in the next few years. Until this is achieved, any rally in the dinar would be counter-productive.