Press Release No. 22/83

IMF Staff Concludes Visit to Serbia

March 22, 2022

• IMF staff had productive discussions with the Serbian authorities on policies to complete the second review under the Policy Coordination Instrument (PCI).
• The Serbian economy has navigated the COVID-19 pandemic well but, like other economies, is currently facing significant uncertainty from the spillovers from the Russia-Ukraine conflict.
• Policy priorities are to preserve macro-fiscal and financial stability, mitigate the impact of the ongoing external shock, and continue reforms to sustain strong growth and raise its inclusiveness further.

Washington, DC: An International Monetary Fund (IMF) mission, led by Jan Kees Martijn, held meetings with the Serbian authorities during March 11 – 22, 2022, to discuss the second review under the Policy Coordination Instrument (PCI). At the conclusion of the mission, Mr. Martijn issued the following statement:

“The IMF mission held productive discussions with the authorities and has made important progress towards reaching a staff level agreement on policies needed to complete the second review under the PCI. Given the unusual economic uncertainty, follow-up discussions will be needed over the coming months. The agreement is subject to approval by the IMF Management and Executive Board. Consideration by the Board is tentatively scheduled for the second half of June 2022.

“The Serbian economy has navigated the COVID-19 pandemic well. Following a mild contraction in 2020, real GDP strongly rebounded by 7.4 percent in 2021 and approached its pre-COVID trend. Driven by rising food and global energy prices, inflation picked up to 8.8 percent in February 2022, but core inflation remained lower at 4.4 percent. Fiscal performance in 2021 was stronger than expected, boosted by recovering tax revenues. The fiscal deficit narrowed to 4.1 percent of GDP, and public debt declined to 57.2 percent of GDP (according to the IMF methodology). Financial sector stability has been maintained. The exchange rate has remained stable.

“However, the war in Ukraine is a big economic shock affecting the global economic outlook, and particularly Europe’s and hence Serbia’s too. It is expected to weigh on Serbia’s economic recovery through supply chain disruptions, higher global commodity prices, effects on global financial conditions, confidence, and lower growth of trading partners. Although the magnitude of the impact is difficult to forecast at this stage, staff will revise growth projections down relative to the previous review, with risks tilted to the downside. Higher global energy and commodity prices will fuel inflationary pressure further this year. Serbia’s medium-term outlook, while uncertain, remains favorable, supported by the authorities’ commitment to structural reforms.

“Immediate policy priorities are to preserve macro-fiscal and financial stability and mitigate the impact of the ongoing external shock. The authorities appropriately formed a task force to help the affected companies navigate supply chain disruptions. Should economic disruptions warrant further support to the affected groups or activities, including the state-owned enterprises (SOEs) in the energy sector, the additional expenditures should be accommodated by reprioritizing the budgeted current and capital spending, within the agreed 3 percent of GDP fiscal deficit ceiling. Any additional emergency assistance should be temporary and targeted to vulnerable households and viable firms. Financial support to the SOEs should be delivered in a transparent manner.

“The National Bank of Serbia (NBS) should stand ready to tighten monetary policy further as needed to contain second-round effects of higher imported prices on inflation while also considering the evolving outlook for growth.

“The banking system remains well-capitalized and liquid, but continued vigilance is essential. We welcome the swift response by the NBS to international sanction-related spillovers on the banking system which was instrumental for preserving financial stability. The NBS timely initiated a resolution procedure in respect of Sberbank Srbija, and quickly finalized its acquisition by a domestic banking group. The financial system has also been provided with sufficient foreign cash to meet additional requests driven by uncertainty.

“The recent disruptions in domestic electricity production demonstrated the urgency of rigorous reform of governance in the main energy companies as well as of implementing a new strategy for investments in the sector. While the current caps on energy prices help maintain social and economic stability, forthcoming price adjustments will need to help ensure cost recovery and financial sustainability of the energy companies without putting pressure on the government budget. When adjusting energy prices, it will be important to soften the impact on vulnerable households.

“The reform momentum should be maintained. In line with program commitments, the authorities have developed a centralized database of the SOE assets and set up mechanisms and criteria for reviewing and approving key decisions of SOEs, which is crucial for continued implementation of the SOE ownership and governance strategy. Progress has also been made in extending coverage of the new central electronic public wage and employment registry which will improve control and support future public wage system. A new e-fiscalization model with expanded coverage is expected to come into force in May 2022 and contribute to reducing the grey economy. We welcome the authorities’ commitment to address the outstanding reform needs, by anchoring medium-term fiscal discipline with a new set of fiscal rules, continuing implementing the new capital market development strategy, and pursuing the transition to greener growth.

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