Press Release No. 14/531

Press Release: IMF Mission Reaches Staff-Level Agreement with Serbia on a Precautionary Stand-By Arrangement

November 20, 2014

An International Monetary Fund (IMF) mission, led by Ms. Zuzana Murgasova, visited Belgrade during November 4–20 to hold Article IV consultation and to continue discussions on an IMF-supported economic program. Pending additional consultation on public enterprises with the World Bank staff, the mission reached staff-level agreement with the authorities, subject to approval by IMF Management and the Executive Board, on an economic program that could be supported by a 36-month precautionary Stand-By Arrangement (SBA) with the IMF. Proposed access could total SDR 935.4 million (around €1 billion), or 200 percent of quota. The mission met with Prime Minister Vučić, Governor of the National Bank of Serbia (NBS) Tabaković, Minister of Finance Vujović, and other public officials, representatives of the business community, and international partners.

At the end of the mission, Ms. Murgasova issued the following statement:

“The economic conditions remain challenging. GDP is expected to contract in 2014, partly due to the floods in May 2014, weakening domestic demand, and troubled corporate balance sheets. Inflation has been below the NBS tolerance band since end-2013. The unemployment rate at over 17 percent poses a major social concern. The augmented general government deficit—including payments for called guarantees and public bank resolution costs—is projected to increase to about 8 percent of GDP in 2014, and public debt to rise to 68 percent of GDP by the end of the year. Without comprehensive policy changes, public debt would continue to rise to unsustainable levels, undermining macroeconomic stability and growth potential.

“The authorities’ new economic program seeks to lay the ground for sustainable growth and job creation over the medium term by implementing ambitious fiscal consolidation and structural reforms. In particular, fiscal adjustment aims to halt the rise in public debt and put it on a downward trajectory by 2017. The accompanying structural reform measures should help create a virtuous cycle of boosting market confidence, private sector investment, and growth.

“The fiscal consolidation under the new economic program will focus primarily on containing expenditures by scaling down the large public sector wage and pension bills, and reducing budget support to public enterprises. At the same time, the existing social safety net will be maintained, to ensure proper protection of the vulnerable groups.

“The authorities’ fiscal effort will be supported by wide-ranging reforms. These include strengthening tax administration to raise efficiency of revenue collection, improving public financial management, enhancing control of public expenditures, and containing fiscal risks. Restructuring of large public enterprises—including the electricity, gas, railways, and road companies—will help reduce the drain on the budget, while ensuring adequate provision of services.

“Monetary and exchange rate policies will continue to be anchored by the inflation targeting framework. Fiscal adjustment is expected to create room for gradual rebalancing of the policy mix towards monetary easing, provided that external financing conditions stabilize. This should help reduce real lending interest rates and support private sector-led growth.

“The banking sector appears broadly stable with generally adequate capitalization and ample liquidity, while stringent regulatory provisions contain the risks stemming from rising non-performing loans (NPLs). Nevertheless, the authorities are committed to implement a comprehensive strategy to reduce the level of NPLs, improve corporate debt workout mechanisms, and increase the credit worthiness of the private sector. Furthermore, the authorities will continue strengthening bank supervision and resolution frameworks to ensure financial system stability.

“Structural weaknesses in Serbia have constrained economic growth. Important legislative reforms were introduced in 2014, including amendments to the Labor, Pension, Corporate Bankruptcy, and Privatization Laws. Going forward, the authorities are committed to implementing comprehensive reforms in order to improve the business environment, reduce the state’s footprint in the economy, and enhance corporate governance. These reforms are expected to boost investment, economic diversification and lead to sustainable private sector-led growth and job creation. International partners, including other international financial institutions (IFIs), are expected to provide assistance.

“The mission is grateful to the authorities and all other counterparts for their excellent cooperation and frank and open discussions.”