Press Release No. 15/504

Press Release: IMF Staff Concludes Visit to Serbia

November 10, 2015

An International Monetary Fund (IMF) mission, led by James Roaf, visited Belgrade during October 29-November 10, 2015, to hold discussions on the third review under Serbia’s precautionary Stand-By Arrangement (SBA) with the IMF. At the conclusion of the visit, Mr. Roaf issued the following statement:

“The mission reached staff-level agreement with the authorities, subject to approval by IMF Management and Executive Board, on policies needed to complete the third review under the SBA. Consideration by the Executive Board is tentatively scheduled for mid-December. The completion of the review will make an additional SDR 70.2 million (€89.6 million) available to Serbia under the SBA, bringing the total funds available to SDR 491 million (€627 million). The Serbian authorities have indicated that they do not intend to draw on the resources available under the arrangement.

“The economic recovery continues to take hold, supported by strong policies and improved confidence. The IMF mission revised up the real GDP growth projections for 2015 and 2016 to 0.75 percent and 1.75 percent, respectively. This improvement reflects earlier-than-expected recovery of the mining and energy sector and a pick-up in investment and job creation. However, despite a milder-than-expected decline, consumption remains subdued. Inflation remains well anchored but below target, on account of still subdued aggregate demand and import prices, and a fall in prices of fruits and vegetables. The external current account deficit is declining, amid significant fiscal rebalancing and robust exports. Continuing sound macroeconomic policies and progress in structural reforms are crucial to maintain and expand the current growth momentum.

“Strong fiscal performance continued in the third quarter. The fiscal outturn in the first nine months of 2015 surpassed program targets, owing to improved revenue collection, but also some under-execution of expenditure, notably in public investment. The general government deficit in 2015 is projected at 4.1 percent of GDP, well below the budgeted deficit of 5.9 percent of GDP, representing a structural deficit improvement of around 2.5 percent of GDP compared to 2014. At the same time, there have been some delays in fiscal and structural reforms, notably general government rightsizing and wage system reform. The mission supports the authorities’ plan to use part of fiscal over-performance in 2015 to cover one-off expenses related to arrears in military pension and payments by Srbijagas. Going forward, it is essential to put public sector reform firmly on track and ensure that state-owned enterprises cease to create repeated fiscal costs.

“The mission agreed with the authorities on the key parameters of the 2016 budget. This involves a further structural deficit improvement of 0.75 percent of GDP, mainly reflecting government rightsizing, containment of wages and pensions, and reductions in subsidies for agriculture and broadcasting. Taking into account severance pay and other one-off expenses, the overall headline deficit will remain close to 4 percent of GDP. The fiscal improvement so far plus a planned increase in fuel excises, allows space for a modest pension increase in 2016, as well as some targeted wage increases aimed at narrowing the wage gaps in the general government. Overall spending on wages and pensions should continue to fall as a share of GDP towards the medium-term targets of 7 and 11 percent of GDP respectively. Improving public investment planning in 2016, including full cost-benefit analysis, is essential to ensure the efficient use of public resources and to contain related fiscal risks.

“With inflation expectation well anchored and the fiscal consolidation progressing, the recent monetary easing is appropriate and should support the private sector growth. Scope for further policy rate cuts will depend on the development of inflation expectations, the external financing environment, and further progress in the envisaged fiscal consolidation.

“The financial sector reform agenda is progressing as planned. Legislative changes to facilitate the removal of impediments to resolving nonperforming loans (NPLs), following the recent adoption of the NPL resolution strategy, are advancing, albeit with some delays. The special diagnostic studies of banks’ asset quality are about to be finalized. Continued advancement of the financial sector agenda would contribute to more vibrant economic activities via improved financial stability and intermediation.

“The mission welcomes the authorities’ renewed commitment to press ahead with a broad-based structural reform agenda. However, more decisive reforms of state-owned enterprises are needed to deliver tangible benefits, including improved financial viability, corporate governance, and private sector-led growth. In this regard, the mission urges the sustainable resolution of 17 strategic companies in coming months, through privatization, restructuring, or bankruptcy, as well as steadfast implementation of energy and transportation sector reforms.

“Overall, the authorities’ comprehensive adjustment and reform program has delivered very good results in its first year, in terms of growth, jobs and reduced fiscal and external imbalances. However, much remains to be achieved to place public debt on a firm downward path, to develop effective public institutions, and to put state-owned enterprises on a market basis. Serbia also faces continued external risks, notably from rising global interest rates, the slowdown in emerging markets, and the potential intensification of the refugee crisis. Adherence to commitments under the IMF-supported program will help address these vulnerabilities and improve Serbia’s economic prospects.”