Press Release No. 16/476

IMF Staff Completes Review Mission to Serbia

November 1, 2016

• Robust fiscal performance continues, while expenditures stayed within the program targets

• Mission supports the intention of the National Bank of Serbia to lower the inflation target

• Decisive actions are needed to end the drain on public resources by state-owned enterprises

An International Monetary Fund (IMF) mission, led by James Roaf, visited Belgrade during October 20 – November 1, 2016, to hold discussions on the sixth 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 IMF mission had constructive discussions with the government led by Prime Minister Aleksandar Vučić, and reached staff-level agreement with the authorities on policies needed to complete the sixth review under the SBA. The agreement is subject to completion of policy actions related to key structural, fiscal, and financial measures, and approval by IMF Management and Executive Board. Consideration by the Executive Board is tentatively scheduled for mid-December. The completion of the review will make an additional SDR 54.57 million (€68.53 million) available to Serbia under the SBA, bringing the total funds available to SDR 662.58 million (€832.14 million). The Serbian authorities have indicated that they do not intend to draw on the resources available under the arrangement.

“Strong performance under Serbia’s economic program continues. Growth is strengthening, and labor market indicators show noticeable improvement. We now expect real GDP growth of 2.7 percent in 2016 and 3 percent in 2017. Inflation remains subdued even as private sector wage growth accelerates. The mission supports the intention of the National Bank of Serbia to lower the inflation target to 3 percent +/-1.5 percent. This change reflects the significant improvement in macroeconomic fundamentals, and reinforces confidence. It should also help further reduce interest rates and encourage greater use of the dinar in the economy. The current cautiously accommodative monetary policy stance remains consistent with the new target, with inflation expected to gradually increase through 2017.

“Robust fiscal performance continues, driven by stronger than expected revenues, while expenditures stayed within the program targets. The general government deficit is now projected at 2.1 percent of GDP in 2016. Public debt is falling a year ahead of schedule, and is projected to end the year below 74 percent of GDP. In view of this over-performance, the mission agreed with the authorities’ plan to use part of the fiscal space in 2016 to cover some one-off expenditures, including a bonus for pensioners and the resolution of historical arrears of state-owned enterprises.

“The mission also reached an agreement with the authorities on the key parameters of the 2017 budget. The priority is to continue with a gradual fiscal consolidation and to ensure public debt is put on a firm downward trend. Within this framework, the mission reached agreement with the authorities on a targeted public wage and pensions increase. The fiscal deficit is expected to decline to 1.7 percent of GDP in 2017, while overall pensions and wage bills continue to decline as shares of GDP, converging to more sustainable levels over the medium-term.

“In order to ensure a durable fiscal improvement and achieve strong, inclusive growth over the medium term, the authorities need to decisively tackle structural challenges. The public sector reforms must be accelerated, to deliver better public services while contributing to the fiscal consolidation process. In particular, reforms of the education system are well overdue.

“Decisive actions are also needed to end the drain on public resources by large utility companies and other state-owned enterprises. In this context, clear plans for the resolution or restructuring of RTB Bor, Resavica, Petrohemija, Azotara and MSK will be required under the program. Importantly, the practice of financing weak public entities and companies through arrears to Srbijagas and EPS needs to be discontinued.

“In the financial sector, the NPL resolution strategy is yielding results, but more decisive action is needed to reduce bad loans, including in state-owned banks. The IMF mission supports the NBS efforts to enhance its macroprudential policy framework, in the context of the implementation of Basel III. Finally, efforts to reform state-owned financial institutions should continue.

“The mission team is grateful for the authorities’ hospitality and close cooperation.”