Press Release No. 23/368

IMF Staff Reaches Staff-Level Agreement with Serbia on the Second Review Under the Stand-By Arrangement

October 31, 2023

• The Serbian authorities and IMF staff reached staff-level agreement on the second review under the 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 2023.
• We welcome the approval of the 2024 budget: The 2.2 percent of GDP deficit is consistent with a conservative policy stance and broader program commitments.
• Macroeconomic outturns under the program remain strong, with signs of growth recovery, ongoing disinflation, a narrowing current account deficit, record high reserves, and a resilient labor market.
• Forcefully pursuing a structural reform agenda centered on energy sector reforms is critical to addressing Serbia’s remaining vulnerabilities and supporting long-term growth.

Washington, DC: An International Monetary Fund (IMF) mission, led by Donal McGettigan, held in-person meetings with the Serbian authorities during October 19-31, 2023 to discuss performance under Serbia’s Stand-By Arrangement. At the conclusion of the mission, Mr. McGettigan issued the following statement:

“I am pleased to announce that the IMF team and the Serbian authorities have reached staff-level agreement on the conclusion of the second review under the Stand-By Arrangement (SBA). The program remains on track with all end-June 2023 quantitative targets met, and all end-September 2023 indicative targets expected to be met based on available data. The structural reform agenda is advancing well. The staff-level agreement is subject to approval by the IMF’s Executive Board, which is scheduled to consider this review in the second half of December 2023. About EUR 400 million (SDR 316.53 million) would become available after the Board meeting. Considering the strong accumulation of reserves and fiscal buffers and the reduction in macroeconomic imbalances, the authorities expressed their intention to treat the SBA as precautionary starting from the current review, earlier than expected at SBA approval.

“The Serbian economy is recovering well from last year’s energy shocks despite headwinds from an adverse global and regional environment. Growth is expected to reach 2 percent in 2023, increasing to 3 percent in 2024 as domestic demand recovers. Unemployment is at an all-time low. Lower regional energy prices and resilient exports have supported a sharp narrowing of the current account deficit, which is expected to fall below 2½ percent of GDP this year. Thanks to continued favorable balance of payments trends, including strong FDI inflows, foreign exchange reserves now exceed EUR 24 billion, an all-time high. Inflation is expected to continue to fall to about 8 percent by end year and is set to return to within the National Bank of Serbia’s (NBS) target range in 2024 assuming tight macroeconomic policies continue. Financial stability has been maintained. Strong revenue growth and falling energy subsidies should allow the 2023 fiscal deficit to fall below 3 percent of GDP and to see a further reduction of public debt to about 53 percent of GDP by the year end. The recent successful auction of dinar-denominated government securities and strong foreign investor interest in sovereign issuances attest to Serbia’s strong economic performance.

“Risks to Serbia’s economic outlook include geopolitical and energy sector developments, uncertainties over trading-partner growth, a still-challenging inflation environment, and further global financial market instability. Yet, the Serbian economy has considerable buffers against uncertainties which include strong foreign exchange reserves and public sector deposits, relatively low public debt, sustainable external debt dynamics, and a well-capitalized and liquid banking system. The SBA provides an additional buffer.

“Going forward, the macroeconomic policy mix should remain tight to ensure that inflation returns to target soon. Between April 2022 and July 2023, the NBS raised the key policy rate by 550 bps to tighten the monetary policy stance. It also raised reserve requirements to absorb excess dinar liquidity in the banking sector. The NBS should stand ready to tighten its monetary policy stance further as needed.

“It is important that fiscal consolidation continues, to rein in debt, to rebuild fiscal space, and to support monetary policy. We welcome the approval of 2024 budget that targets a deficit of 2.2 percent of GDP, consistent with an ongoing tight policy stance and with a view toward reducing the deficit further to 1.5 percent of GDP in 2025 to adhere to the fiscal rule. Public sector wages and pensions will be increased in line with the fiscal rule. The budget maintains high capital spending to meet sizeable infrastructure needs and does not envisage liquidity support to energy state-owned enterprises (SOEs) barring any large negative shocks.  

“More broadly, fiscal policy in the period ahead should fully adhere to the fiscal rule, avoid ad-hoc spending measures, and ensure efficient public investment spending. We welcome the ongoing efforts to improve public workforce planning, medium-term budgeting, enhance fiscal risks and public investment management, and modernize tax administration. Finalizing a new HR strategy for tax administration and accelerating hiring procedures has become a top priority given declining staffing levels and imminent further retirements.

“The financial sector has remained stable, yet continued vigilance is required in a higher-for-longer interest rate environment.  The temporary interest rate cap on mortgages should be allowed to lapse as scheduled at end-2024. We welcome ongoing progress towards fully aligning the supervisory framework with international standards.

“We welcome the ongoing energy sector reforms to address weaknesses in Serbia’s energy sector. Higher electricity tariffs have contributed to achieving medium-term cost recovery of the state-owned electricity company EPS. We also welcome major governance reforms within the EPS. The priority now is to deliver on a broader EPS restructuring plan. Going forward, it is important to ensure sustainability of the electricity and gas pricing systems, and to make further adjustments to tariffs if needed, especially if risks of higher gas transit costs materialize.

“We welcome the approval of the new landmark SOE governance law, which is aligned with the OECD Guidelines on Corporate Governance of SOEs. It is important now to press ahead with preparing secondary legislation to make the law fully operational by September 2024.

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