Press Release No. 18/299

IMF Executive Board Approves 30-Month Policy Coordination Instrument for Serbia

July 18, 2018

ANNEX

Recent Economic Developments

Serbia has succeeded in addressing macroeconomic imbalances and restoring confidence. Supported by a three-year precautionary SBA successfully completed in February 2018, the authorities have restored fiscal sustainability, putting public debt on a firm downward path, and realigned the external position with fundamentals. Monetary policy has kept inflation under firm control, while supporting economic recovery and maintaining broad exchange rate stability. The confidence instilled by the improved macroeconomic situation has been reflected in rising investment, both from foreign and domestic sources, and supported an economic recovery.

The economic outlook remains positive. Growth reached 4.6 percent y-o-y in the first quarter and is expected to reach at least 3.5 percent in 2018, driven by consumption, investment, and exports. Inflation remains low, and is projected to be around 2 percent at end-2018, supported by the appropriate monetary policy of the National Bank of Serbia. Budget results for the first quarter of 2018 point to another year of fiscal surplus.

Nonetheless, Serbia remains susceptible to spillovers from regional and global developments and market volatility, including potential increased risk aversion for emerging markets. On the domestic front, delay in delivering on structural reforms, or erosion of fiscal discipline, could undermine confidence and reduce medium-term growth prospects.

Program Summary

The program is designed to maintain macroeconomic and financial stability, while advancing an ambitious structural and institutional reform agenda, to foster rapid and inclusive growth, job creation, and improved living standards. The authorities’ fiscal policy targets a small overall deficit from 2019 on, accommodating growth-oriented policies such as increased capital spending to address Serbia’s large infrastructure needs and some targeted reductions in the tax burden on labor and business, while supporting the reduction of public debt to about 50 percent of GDP by the end of the program.

The National Bank of Serbia’s (NBS) current state-contingent monetary policy stance remains appropriate in light of the domestic and external environment. The PCI aims to further strengthen coordination of liquidity management and promote dinarization. The authorities’ financial sector priorities include continued reduction of non-performing loans, reforming state-owned financial institutions, aligning financial regulatory and supervisory frameworks with EU standards, and addressing identified weaknesses in the AML/CFT framework.

Structural and institutional reforms focus on tackling the large shadow economy, further increasing labor market participation, and reducing the economic reliance on the public sector, including through public administration reforms and restructuring of state-owned utilities, enterprises, and financial institutions.