Press Release No. 22/366

IMF Staff Reaches Staff-Level Agreement with Serbia on the Third Review Under the Policy Coordination Instrument and a Stand-By Arrangement Request

November 2, 2022

• The Serbian authorities and IMF staff reached staff-level agreement on the third review under the Policy Coordination Instrument (PCI) and a 24-month Stand-By Arrangement (SBA). The agreement is subject to approval by the IMF Executive Board and is expected to be considered by the Board in December 2022.
• The proposed SBA will help address Serbia’s emerging external and fiscal financing needs given the challenging global economic environment and will support the authorities’ macroeconomic policies and structural reform efforts, with focus on the energy sector.
• The SBA will replace the existing PCI and build on the PCI reform agenda with appropriate modifications for recent policy challenges.

Washington, DC: An International Monetary Fund (IMF) mission, led by Jan Kees Martijn, held in-person meetings with the Serbian authorities during October 20 – November 2, 2022 to discuss performance under the PCI and the authorities’ request for a Stand-By Arrangement. At the conclusion of the mission, Mr. Martijn issued the following statement:

“I am pleased to announce that the IMF team and the Serbian authorities have reached staff-level agreement on a 24-month Stand-By Arrangement (SBA) with access amounting to SDR 1.9 billion, equivalent to about EUR 2.4 billion. This arrangement would help address emerging external and fiscal financing needs given the challenging global economic environment and support the authorities’ macroeconomic policies and structural reform efforts, with a focus on the energy sector. The authorities intend to use the financing that will become available during the first part of the arrangement and to treat the remaining access as precautionary. The agreement is subject to approval by the IMF Executive Board, which is expected to consider it in December 2022. The SBA would replace the existing PCI and will build on the PCI reform agenda with appropriate modifications for recent policy challenges

“After a strong recovery from the pandemic, Serbia is now facing headwinds from the adverse global and regional environment, including Russia’s war in Ukraine. GDP growth is projected to slow to about 2½ percent in 2022 because of weaker external demand from EU trading partners along with higher energy prices, supply chain disruptions, and the recent drought, and to 2¼ percent in 2023. Driven mainly by rising food and global energy prices, headline inflation is expected at about 12 percent on average in 2022. It is projected to slow in 2023 and return within the National Bank of Serbia’s target band in 2024. Sharply higher energy import costs along with shortfalls in domestic electricity production, as well as weakening external demand are expected to widen the current account deficit to about 9 percent of GDP, both in 2022 and 2023. Despite the adverse global environment, financial sector stability has been maintained and the exchange rate has remained stable.

“The fiscal deficit in 2022 is expected to exceed the original budget projection. While revenue performance has been strong, the losses of the energy state-owned enterprises (SOEs) in a context of a current energy crisis are resulting in substantial fiscal costs. The authorities have also implemented additional expenditure measures to soften the impact of cost-of-living shocks on the population.

“Exceptional uncertainty dominates the near-team outlook with risks mostly to the downside. Yet, the Serbian economy has the buffers to withstand these risks, including adequate foreign exchange reserves, moderate external and public debt levels, a well-capitalized and liquid banking system, and a track record of timely policy responses to various shocks. The SBA would provide an additional buffer, while the authorities adjust policies and implement reforms to tackle the current challenges and strengthen the economy’s performance and resilience.

“The macroeconomic policy mix should be tight to contain high inflation and support exchange rate stability. While high inflation was triggered by rising food and global energy prices, the ongoing monetary tightening is crucial to ensure that inflation does not become entrenched.

“It is important that fiscal consolidation supports monetary policy. Accordingly, the mission agreed with the authorities on a decline in the total fiscal deficit in 2023. Public sector wage increases should be limited, and structural pension increases guided by the indexation formula consistent with the new fiscal rule. The budget will maintain high capital expenditure to address Serbia’s sizeable infrastructure needs. Approval of a budget with a deficit and primary spending level along these lines would be a prior action for the approval of the SBA request.

“More broadly, Serbia’s public finances should be bolstered by ongoing reforms to public financial management. The upcoming adoption of a new fiscal rule will help anchor fiscal consolidation and restore fiscal buffers beyond the program period. The program also includes reforms to improve medium-term budgeting, fiscal risks and public investment management, and help control wage costs.

“The exposed weaknesses in Serbia’s energy sector require complementary reforms to ensure energy security, put the energy sector on a sound financial footing and promote energy conservation. Meeting these goals will require further adjustment in energy tariffs as needed, while targeted support for vulnerable households should be expanded.

“It will be equally important to restructure the energy sector, improve production and investment planning, and strengthen financial oversight and governance in the energy state-owned enterprises.

“We welcome the authorities’ commitment to address the outstanding reform needs by further modernizing tax administration, enhancing social protection, and implementing the new capital market development strategy. In line with outstanding program commitments under the PCI, the authorities should adopt the new law to strengthen the management of SOEs and finalize the conversion of the state-owned power utility Elektroprivreda Srbije (EPS) into a joint stock company.

“The IMF team would like to thank all their counterparts for the open and constructive discussions and for their close collaboration.”