Serbia has a transitional economy mostly dominated by market forces, but the state sector remains large and many institutional reforms are needed.
The economy relies on manufacturing and exports, driven largely by foreign investment. MILOSEVIC-era mismanagement of the economy, an extended period of international economic sanctions, civil war, and the damage to Yugoslavia's infrastructure and industry during the NATO airstrikes in 1999 left the economy only half the size it was in 1990.
After the ousting of former Federal Yugoslav President MILOSEVIC in September 2000, the Democratic Opposition of Serbia (DOS) coalition government implemented stabilization measures and embarked on a market reform program.
After renewing its membership in the IMF in December 2000, Serbia continued to reintegrate into the international community by rejoining the World Bank (IBRD) and the European Bank for Reconstruction and Development (EBRD).
Serbia has made progress in trade liberalization and enterprise restructuring and privatization, but many large enterprises — including the power utilities, telecommunications company, natural gas company, national air carrier, and others — remain in state hands.
Serbia has made some progress towards EU membership, signing a Stabilization and Association Agreement with Brussels in May 2008, and with full implementation of the Interim Trade Agreement with the EU in February 2010, gained candidate status in March 2012.
Serbia's negotiations with the World Trade Organization are advanced, with the country's complete ban on the trade and cultivation of agricultural biotechnology products representing the primary remaining obstacle to accession.
Serbia's program with the IMF was frozen in early 2012 because the 2012 budget approved by parliament deviated from the program parameters; the arrangement is now void.
High unemployment and stagnant household incomes are ongoing political and economic problems. Structural economic reforms needed to ensure the country's long-term prosperity have largely stalled since the onset of the global financial crisis.
The economy slipped by an estimated 2.0% in 2012, following growth of 1.6% in 2011, 1.0% in 2010, and a 3.5% contraction in 2009.
Growing deficits constrain the use of stimulus efforts to revive the economy and contribute to growing concern of a public debt crisis, given that Serbia's total public debt as a share of GDP doubled between 2008 and 2012, reaching 61.5% of GDP at the end of 2012.
Further, Serbia's concerns about inflation and exchange rate stability preclude the use of expansionary monetary policy.
Serbia adopted a new long-term economic growth plan in 2010 that calls for a quadrupling of exports over ten years and heavy investments in basic infrastructure.
In 2012, however, exports fell by 3.6% compared to 2011, largely as a result of the halt in production at the former US Steel plant and a summer drought that slashed agricultural production.
Major challenges ahead include: high unemployment rates and the need for job creation; high government expenditures for salaries, pensions, and unemployment benefits; a growing need for new government borrowing; rising public and private foreign debt; attracting new foreign direct investment; and getting the IMF program back on track.
Other serious challenges include an inefficient judicial system, high levels of corruption, and an aging population.
Factors favorable to Serbia's economic growth include a strategic location, a relatively inexpensive and skilled labor force, and free trade agreements with the EU, Russia, Turkey, and countries that are members of the Central European Free Trade Agreement (CEFTA).