By Biagio Carrano
Who would invest in a country where industrial electricity prices have risen by as much as 120% in the past five years, where real inflation on many essential goods has reached 100%, where the minimum wage has grown by 80%, and where the cost per square metre for industrial facilities has increased by up to 40%?
Data by National Bank of Serbia, “Macroeconomic Trends”, 1st December 2024
Yet, by the end of 2024, Serbia will have come close to €5 billion in foreign direct investments (FDI), marking its best-ever result, following the excellent figures of €4.6 billion in 2023 and €4.4 billion in 2022. For a country that has long marketed itself to investors based on low operating costs (as still advertised by the Serbian Development Agency), this may seem paradoxical. However, it reflects a shift in the investment landscape that deserves analysis. This new direction is unnerving only for those nostalgic for the days when one could profit from moving low-cost production to a country impoverished by wars, embargoes, and reckless privatisation.
The wage boom
Just five years ago, it would have been hard to imagine that Serbia’s minimum wage—long touted by local politicians as a key draw for investors—would increase by nearly 80% in the following five years. It would have been even harder to foresee that, even in the country’s less developed regions, this net wage—equivalent to €442 today—would now be considered entirely insufficient. Meanwhile, the average net monthly salary has jumped 62% over the past five years, reaching almost €830 by late November. Compared to neighbouring countries—€703 in Bosnia and Herzegovina, €680 in North Macedonia, €838 in Montenegro, €575 in Albania, and €460 in Kosovo—it becomes clear that labour costs alone do not explain the rising inflow of foreign investments, which accounts for roughly half of all FDI in the region.
Belgrade’s wage dynamics are even more pronounced due to its predominantly tertiary sector economy. Beyond its celebrated IT industry, even less innovative sectors like remote customer service have seen salaries double in four years. Along with having the highest wages and prices of any non-EU country in the region, Serbia’s capital is also marked by salary polarisation, setting it apart from the rest of the country and aligning it with Eastern EU capitals.
Despite Serbia’s GDP lagging behind many of its regional counterparts, Belgrade’s average net salary has reached €1,000, on par with Sofia (€1,000; national GDP $101 billion), Budapest (€1,071; national GDP $212 billion), and Bratislava (€1,092; national GDP $132 billion). However, it remains below Zagreb (€1,525; national GDP $82.6 billion). In Belgrade’s four central municipalities—Stari Grad, Savski Venac, Novi Beograd, and Vračar, home to 350,000 people—net salaries exceed €1,300 per month.
Conversely, wages in the rest of the country rarely exceed €600, highlighting an even starker income disparity between the capital and other regions. This polarisation is not only an economic challenge but also a social and political one. The Belgrade-Novi Sad-Inđija corridor generates nearly 60% of the nation’s GDP in both industrial and commercial terms and follows a markedly different development trajectory than the rest of the country.
At the same time, the appeal of this corridor is hollowing out medium and small towns, where wages are lower—if enough workers can even be found. Between 2011 and 2022, Serbia lost 7% of its population, with a further 264,000 people departing between 2022 and 2024. The capital is the only area with a growing population, up 1% over the considered period but realistically closer to 10% in the past two years, thanks to an influx of migrants, mainly from Russia but increasingly from Asian and African countries.
With the exception of Subotica, all Serbian cities with populations over 100,000 are shrinking.
In the past decade, smaller Serbian towns have experienced significant population declines. For instance, Sombor’s population dropped from 85,000 to 73,000, Kikinda from 59,000 to 50,000, Sremska Mitrovica from 79,940 to 73,822, and Jagodina from 71,852 to 66,529. No town, not even those benefiting from significant industrial investments, has escaped the combined effects of declining birth rates and emigration to Belgrade, Novi Sad, or abroad. This trend has further driven up wages.
The importation of labour from Asian or African countries is unlikely to reverse the trend, as the population decreases described here far exceed Serbia’s current capacity to manage work-related migration flows.
The Price surge
A key factor influencing foreign investors’ decisions is certainly not the prices they encounter in the country. Despite reassurances from the National Bank of Serbia about declining inflation—which officially grew by 51% in compounded terms between 2020 and 2024—food prices, which naturally weigh most heavily on the budgets of middle- and low-income families, have merely slowed their growth. These prices reached extreme peaks of 22.1% monthly in October 2021.
While meat imports have kept prices relatively stable, the dairy supply chain (including yoghurt and cheese) saw price increases of up to 100%. Meanwhile, staple goods frequently purchased by Serbs have nearly or more than doubled in price since 2021:
300 grams of Jaffa biscuits increased from 80 to 220 dinars;150 grams of Plazma biscuits plus 300 grams of granules rose from 250 dinars to 470;100 grams of Bonito instant coffee climbed from 84 to 150 dinars;1 kilogram of Javor soft-slicing cheese jumped from 480 to 1,100 dinars;1 litre of Nektar apple juice increased from 80 to 124 dinars;400 grams of Grekos yoghurt went from 100 to 130 dinars;Category L eggs rose from 14 to 22 dinars each, reflecting a 57% increase in three years.*
These are essential and commonly purchased items for every Serbian household. On top of this, imported goods such as extra virgin olive oil rose by 150%, while Italian rice increased by no less than 100%. These figures illustrate how household budgets have been devastated by the rising costs of basic food consumption.
With food accounting for 41% of Serbia’s basic consumption basket, it is clear that food inflation has been underrepresented in official statistics over the past few years.
Structure of the average consumption basket in Serbia: 41.37% food and non-alcoholic beverages; 8.57% alcoholic beverages and tobacco; 20.14% rent, mortgages, communal services; 6.8% transport; 5.61% footwear and clothing; 4.09% furniture and household goods; 13.42% health, communications, entertainment and culture, education, restaurants and hotels, other goods and services.
Between 2021 and 2024, Serbia experienced a combination of three distinct types of inflation.
Demand-driven inflation
This was fuelled by those who benefited from the boom in the real estate and construction sectors (entrepreneurs, supply chain professionals, and commercial intermediaries) and the IT sector. The number of high-income earners expanded, joined by many members of the Russian diaspora, numbering no fewer than 200,000. Many of these individuals had a higher spending capacity than Serbs, not only due to their ITC sector incomes but also because they brought liquid assets from the sale of properties in Russia.
This situation drove up property sale prices and rents, particularly in Belgrade and Novi Sad. Over the course of a year, the two largest cities in Serbia saw their populations increase by nearly 10%, primarily composed of individuals with medium-to-high incomes by national standards. This surge in demand spiked the prices of everyday goods, durable goods, and luxury items such as cars, high-end furniture, and restaurant dining.
Energy cost inflation
As seen throughout post-pandemic Europe, rising energy costs impacted industrial production and citizen services such as heating and electricity. Between 1 September 2022 and 1 November 2023, electricity prices increased fourfold, totalling a 34.2% rise. Meanwhile, property-related utility costs bundled in the “Infostan” bill rose by 30% over three years.
While industrial electricity prices in Serbia are currently trending downward in the short term, the country’s lack of competitiveness compared to regional and EU-27 nations is evident.
Market oversight failures
The absence of effective market surveillance mechanisms and penalties for cartel strategies among commercial operators has played a role in inflation. The trade sector recorded the highest increases in added value in recent quarters.
Former Minister Momirović and other officials from the Ministry of Trade repeatedly denied, in various public forums, that prices in Serbia were higher than in other European countries. However, instead of investigating potential price-fixing agreements among major retail chains or excessive importer margins, the minister highlighted the supposed benefits of a humble diet based on eggs and low-quality processed foods, such as the nowadays renowned Serbian Parizer frankfurter. Ironically, the price of Parizer, perhaps buoyed by this unexpected institutional endorsement, rose by more than 15% in a year.
Contrary to the assertions of many managers and entrepreneurs, the price-wage spiral has not significantly reduced Serbia’s competitiveness, except in certain industries.
For example, in 2025, the total employer cost for a minimum wage worker in Serbia will amount to €8,300 annually. By comparison, in a low-wage EU country such as Italy, the cost of employing a worker with a net monthly salary of €1,100 (including a 13th salary) is just under €31,000—nearly four times the Serbian minimum wage.
Even when considering Serbia’s national average salary—approximately 96,000 dinars net per month, with an annual employer cost of €15,750—this figure remains just over a third of the annual business cost of an Italian worker earning €1,500 net per month.
The increase in wages and the shortage of workers, the combined result of emigration and the country’s demographic crisis, have led many businesses to rely on foreign workers, making Serbia, after decades, a country where the number of incoming workers surpasses those leaving. Between February and October 2024, over 34,000 integrated residence and work permits were issued, exceeding the annual average of 32,000 people who choose to leave the country. This trend will likely continue to grow in the coming years, though it is unlikely to slow the rise in wages.
Business leaders who hope for a return to the production cost conditions of ten years ago and expect government intervention in this regard not only fail to understand the country’s trends and government objectives but also do a disservice to the businesses they lead. These businesses become bogged down in outdated industrial practices reminiscent of the 1950s: pressuring employees over breaks and sick leave, threatening tax audits, complaining to mayors about the supposed indiscipline of underpaid workers, and expecting local teenagers to happily embrace repetitive and unskilled jobs.
Instead, businesses must correctly interpret the changing landscape to find ways to evolve alongside this new socio-economic environment, which international agencies estimate will grow at an annual rate of 4% over the next three years.
Production offshoring to Serbia in pursuit of low labour costs, public subsidies, tax breaks, and more lenient environmental regulations is no longer, in itself, a driver of competitive growth. This is because companies aiming to operate in international markets and serve wealthier ones cannot expect to compete or accelerate their growth using these factors, which will increasingly align with continental averages or fall short compared to countries where such conditions are even more extreme.
The manufacture of semi-finished goods and subcontracted products will continue to suffer margin erosion, as it is often unable to revise pre-agreed delivery prices while facing the cost pressures outlined earlier. Without significant investments in advanced managerial skills, automated machinery, and corporate energy efficiency policies, such businesses will struggle to withstand this changing scenario.
Conversely, those producing finished goods, whether tangible or intangible, have the ability to offset cost increases through revenue and, more importantly, to compete by offering higher-margin products to the market. Component manufacturers with significant contributions from technology or research and development can effectively leverage their competitive edge with clients, both in terms of margins and long-term stabilisation of supply contracts. Additionally, the relocation of production units from Asia, through friendshoring or nearshoring, will falter if it does not enhance value-added production, including improved customer service through logistical proximity.
The “investment grade” rating given to Serbia by Standard & Poor’s for the first time in its history last October opens new financing opportunities for businesses located in Serbia, making them attractive to investment funds, family offices, and individual companies interested in acquiring established ventures. However, in the context described, offering potential investors labour-intensive assembly operations without competent management, international vision, or investments in automation, patents, or innovation will hold little appeal.
Despite some contradictions, an economic and industrial policy aimed at increasing the stock of high-innovation fixed capital and highly trained human capital is gradually taking shape. The transformation envisioned by the country’s most forward-thinking minds involves moving from growth driven by foreign investments and consumption, as is still the case today, to endogenous growth based on innovative local industries. In this model, productivity per worker derives from the quality of machinery and the skills of personnel, with a focus on the added value of finished products rather than cost-cutting in subcontracting.
Why Serbia?
Investing in Serbia today is less about focusing on costs and more about adopting a strategic approach to internationalisation that identifies production factors and contextual advantages, adapting them to the company’s goals and customer needs. Easy access to world-class IT skills is crucial for any company aiming to produce high added value and move towards automation and artificial intelligence to address labour shortages.
There is significant availability of funds, credit lines, and subsidies from international and state institutions, as well as tax incentives provided by the government to support the digital and ecological transformation of companies. A banking system, while somewhat delayed, is capable of managing transactions with regions of the world from which the West is increasingly distancing itself. Together with the free trade agreement with China that came into force on 1 July 2024, this enables companies to overcome several barriers that have arisen in recent years and are unlikely to be removed in the short term.
The political will to make Belgrade a regional hub for Asian countries entering Europe and vice versa, as well as a reference point for many African countries, simplifies the opening of trade channels and collaborative initiatives. A national geopolitical strategy, albeit a challenging one, seeks dialogue with all global and regional powers, as well as emerging countries, including those in Africa, thereby facilitating access to many markets for Serbian companies.
Added to this is an airport that, under its contractual obligations, is set to become one of the largest in Eastern Europe. Between 2022 and 2023 alone, it added 2.3 million passengers, climbing 15 positions in the European rankings.
Thus, coming to or evolving in Serbia to develop innovation and efficiency—in products, processes, technology, markets, personnel, and organisation—is the only realistic perspective for overcoming the challenges of a country that, alongside the various opportunities we have mentioned, also demonstrates all the difficulties of an economic transformation phase and all the tensions of a society increasingly polarised not only in terms of income but also socially and politically.
*Prices are based on the best offers observed during the third week of December 2024 on the website cenoteka.rs.
This post is also available in: Italiano
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Publish date : 2024-12-19 02:14:00
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