IMF Staff Completes Final Review Mission to Serbia

IMF News, November 7, 2017

Source details

Mission leader: James Roaf.
Mission visit dates: October 26 – November 7, 2017.
Purpose: Discussions on the eighth and final review under Serbia’s precautionary Stand-By Arrangement (SBA).
Staff-level outcome: Agreement on policies needed to complete the eighth review under the SBA.
Conditions and timeline:
- All end-September 2017 performance criteria have been met, most with significant margins.
- Implementation of structural benchmarks has continued, although with delays in some areas.
- Agreement is subject to completion of key structural, fiscal, and financial policy actions, and approval by IMF Management and Executive Board.
- Consideration by the Board is tentatively scheduled for late December.
- Following this review, the program will conclude on February 23, 2018.

Completion of the review will make an additional SDR 99.14 million (€119.4 million) available to Serbia under the SBA.
Total funds available under the SBA after the review: SDR 871.8 million (€1,05 billion).
The Serbian authorities have indicated that they do not intend to draw on the resources available under the arrangement.

Noted near-term shock: Temporary slowdown caused mainly by the drought and electricity disruptions.
Underlying drivers: Robust underlying economic activity supported by strong growth of exports, private consumption and investment.
Labor market: New private sector jobs being created and a significant fall in unemployment.
Growth projections:
- Real GDP growth of 2 percent in 2017.
- Real GDP growth of 3.5 percent in 2018.
Inflation: Projected to remain close to the center of the NBS target range.
Monetary policy assessment: The monetary policy stance is appropriate given the low inflation outlook and exchange rate developments.

Fiscal over-performance drivers: Strong revenues, a lower interest rate bill, and under-execution of capital expenditures.
General government balance for 2017: Projected to be around zero, compared to the original budget deficit target of 1.7 percent of GDP.
Public debt:
- Public debt-to-GDP ratio fell to 65.4 percent at end-September.
- This level is more than 10 percent of GDP below the 2015 peak.
Government plans for 2017 fiscal space: Use part of the fiscal space to grant a bonus for pensioners as well as some wage bonuses.
2018 budget priorities agreed with mission:
- Preserve fiscal achievements.
- Support growth-enhancing initiatives, such as increasing public investment and reducing the tax burden on low-income workers.
- Along with agreed wage and pension increases, the 2018 fiscal deficit is projected at 0.7 percent of GDP — a level consistent with fiscal sustainability and further public debt reduction.

Progress noted:
- Financing of weak public entities through arrears to Srbijagas and electricity company EPS has been significantly reduced.
- Reforms in railways have continued.
- Pharmaceutical company Galenika has been privatized.
Remaining challenges:
- Resolution of some problem enterprises, especially in the petrochemical and mining sectors, is still pending.
- Public administration reforms need acceleration to improve quality of public services and reduce fiscal risks.
- Passage of secondary legislation for the new public wage system identified as a key milestone.

Current status: Recent improvements in business survey rankings are welcome.
Policy recommendations:
- Stronger efforts to improve the business environment are needed to foster faster private sector growth and convergence to EU income levels.
- Substantial reform efforts required to foster competition and reduce regulatory and administrative burden on enterprises.
- Priorities include modernizing tax administration and increasing transparency and predictability of public fees and charges.

Non-performing loans (NPLs): Resolution strategy has continued to yield very good results.
Banks and lending:
- More decisive action is needed in state-owned banks.
- Bank lending is increasing, supporting economic growth.
Regulatory progress: Significant progress has been made to upgrade bank supervision and align regulations with EU standards, helping ensure financial stability.

Mission gratitude: The mission expressed gratitude for the authorities’ hospitality and close cooperation.

Source: IMF Communications Department press release, November 7, 2017.