Press Release No. 19/375

IMF Staff Completes Review Mission to Serbia

October 15, 2019

• IMF staff reached staff-level agreement on policies needed to complete the third review under the Policy Coordination Instrument.
• Serbia’s economic performance remains robust, with unemployment falling to record-low levels, and GDP growth projected to accelerate to 4 percent in 2020.
• Structural reforms continue to advance albeit with delays in certain areas.

An International Monetary Fund (IMF) mission, led by Jan Kees Martijn, visited Belgrade during October 3 – 15, 2019, to hold discussions on the third review under Serbia’s Policy Coordination Instrument (PCI). At the conclusion of the visit, Mr. Martijn issued the following statement:

“The IMF mission held constructive discussions with the authorities and reached staff-level agreement on policies needed to complete the third review under the PCI. End-September 2019 quantitative targets are expected to have been met, and implementation of structural reforms has continued, albeit with delays in some areas. The agreement is subject to completion of key policy actions, and approval by IMF Management and Executive Board. Consideration by the Board is tentatively scheduled for the second half of December.

“Serbia’s economic performance remains robust, with unemployment falling to record-low levels. We project real GDP growth at 3.5 percent in 2019 and 4 percent in 2020, supported by strong domestic demand. Inflation has remained low and is expected to be in the lower half of the inflation target range in 2020. The accommodative monetary stance remains appropriate in light of low inflationary pressures.

“Strong fiscal performance continued in the first three quarters of 2019. The general government recorded a surplus during January-August, public debt continues to decline, and yields on government bonds have reached historically-low levels.

“The government adopted a supplementary budget, allowing for additional capital spending, a one-off payment to pensioners, and increases of public sector wages. While these measures do not jeopardize fiscal sustainability, the authorities should closely monitor budget execution through the end of the year to make sure the deficit stays within the program ceiling. Regarding wages, giving larger increases to retain specific groups of workers is justified. However, the overall wage bill is now growing faster than nominal GDP, for a second year in a row, which deviates from the authorities’ commitments in this area and our advice.

“The mission agreed with the authorities on the key parameters of the 2020 budget, targeting an overall fiscal deficit of 0.5 percent of GDP. This level would preserve fiscal discipline and keep public debt on a downward path. The reintroduction of pension indexation in 2020 will ensure a more rules-based system. Current plans to introduce a new set of fiscal rules for 2021 onwards will help preserve hard-won gains and ensure fiscal sustainability.

“The financial sector remains stable. Non-performing loans in the banking sector have fallen under 5 percent, the lowest level since 2008. The deposit insurance framework has been strengthened. Developing capital markets and continuing to promote dinarization will be important to further enhance financial stability and support medium-term growth.

“Structural reforms continue to advance but stronger commitment to implementation in certain areas is needed to boost Serbia’s growth potential and limit fiscal risks. Progress has been made in reforming tax administration, strengthening public investment management frameworks, and privatizing Komercijalna. However, the reforms of the public wage system and public employment framework have faced substantial delays. Further actions are needed to strengthen SOE management and corporate governance. A thorough assessment of electricity tariffs is warranted to ensure full-cost recovery.

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