Press Release No. 24/371

IMF Staff Reaches Staff-Level Agreement with Serbia on the Fourth Review under the Stand-By Arrangement and on a 36-Month Policy Coordination Instrument Request

October 16, 2024

• The Serbian authorities and IMF staff reached staff-level agreement on the fourth and final review under the Stand-By Arrangement (SBA) and on a successor 36-month Policy Coordination Instrument (PCI) request. The PCI is a non-financing instrument designed to support strong economic policies. The agreement is subject to approval by the IMF Executive Board and is expected to be considered by the Board in December 2024.
• Macroeconomic outcomes in Serbia remain strong. Growth and the labor market are robust, and inflation has fallen. Foreign exchange reserves are at a record high, and the public debt burden continues to decline.
• Under the PCI, Serbia commits to fiscal deficits not exceeding 3.0 percent of GDP over 2025-27, to further prioritize spending in case of fiscal shocks, and to keep public wage and pension increases aligned with its fiscal rules. The PCI will balance Serbia’s public investment and social expenditure needs with continued fiscal discipline to support sustainable growth while keeping public debt on a downward path.

Washington, DC: An International Monetary Fund (IMF) mission, led by Donal McGettigan, met with the Serbian authorities during October 3-15, 2024, to discuss performance under Serbia’s Stand-By Arrangement (SBA) and the authorities’ request for a successor 36-month Policy Coordination Instrument (PCI) that will run from December 2024 to December 2027. The PCI is a non-financing instrument designed to support strong economic policies. At the conclusion of the mission, Mr. McGettigan issued the following statement:

“I am pleased to announce that the Serbian authorities and the IMF team have reached staff-level agreement on the conclusion of the fourth and final review under the SBA and on a successor 36-month PCI.

“The two-year SBA was approved by the IMF Executive Board in December 2022. It supported Serbia in navigating a period of major economic uncertainty and energy price volatility. Under the SBA, Serbia successfully implemented macroeconomic policies that underpinned external and fiscal sustainability and that rebuilt buffers to deal with future shocks. Serbia has increased and modernized its energy tariffs and has initiated corporate restructuring at the electricity provider EPS to improve the financial sustainability and efficiency of the energy sector. Serbia also made good progress on important fiscal structural reforms and advanced efforts to improve state-owned enterprise (SOE) governance.

“Reflecting the success of the economic program supported by the SBA, and in view of Serbia’s commitment to continued strong economic policies, Serbia was awarded an investment grade credit rating for the first time, by S&P Global Ratings, in October 2024.

 “Serbia’s macroeconomic outcomes in 2024 are impressive. We project growth to reach 3.9 percent in 2024 and to increase to around 4¼ percent over the coming years. Headline inflation has returned to the National Bank of Serbia’s target band, supported by tighter monetary policy and easing energy and food prices, but core inflation remains elevated.

“The fiscal deficit is set to increase to 2.7 percent of GDP in 2024, to help fund additional infrastructure, social, and defense spending needs.  Based on strong fiscal revenue performance, robust economic growth, and a recent upward GDP revision, public debt is expected to fall to about 48 percent of GDP by end-2024.

“As domestic demand picks up, and Serbia’s public investment drive continues, the current account deficit is projected to widen in 2024 and to increase further over the medium term. Continued strong FDI inflows are, however, expected to more than offset the current account deficit over the coming years and to allow for ongoing reserve accumulation. The financial sector is well-capitalized and liquid.

“Key risks to Serbia’s economic outlook include: foreign demand, FDI and commodity price outlooks that are subject to uncertainty and risks, deepening geoeconomic fragmentation, and the exposure of agricultural output and economic activity to climate change and extreme weather events.

“Serbia therefore needs ample buffers against uncertainties and risks. Encouragingly, foreign exchange reserves and government deposits are high, public debt and external debt are sustainable, and the banking system is strong. Continued prudent polices provide an additional important buffer. 

“Serbia’s program performance under the SBA remains strong. All relevant quantitative and standard continuous performance criteria have been met, as have most indicative targets and structural benchmarks. Thanks to progress made under the SBA, Serbia intends to continue to treat the SBA, set to expire in December 2024, as precautionary.

“To continue leveraging IMF support for Serbia’s economic policies, the Serbian authorities and IMF staff also reached an agreement on medium-term macroeconomic and financial policies under a successor 36-month Policy Coordination Instrument (PCI) that will run from December 2024 to December 2027. The PCI will support Serbia in credibly maintaining fiscal discipline while making room for spending on public investment and other essential items. The PCI will also help Serbia advance its ongoing ambitious structural reform agenda, focused on fiscal, SOE, and energy reforms.

“Under the PCI, the Serbian authorities commit to keeping the annual overall fiscal deficit at no more than 3.0 percent of GDP over 2025-27. Absent large adverse shocks, this would be consistent with an ongoing decline in the public debt burden. To achieve this core macroeconomic objective, the authorities commit to adhere to their special fiscal rules on public wages and pensions which they adopted in 2022, and to review options for rationalizing and monitoring expenditure items that grew rapidly in 2024. In the event of additional fiscal spending pressures, the authorities commit to further prioritizing public spending.

“The PCI will help the authorities improve public financial management, public investment management, fiscal risk management, fiscal transparency, and public workforce and pension planning. It will also leverage extensive IMF technical assistance to resolve staffing challenges in the tax administration, an urgent and macro-critical priority. It will assist the authorities in refining and operationalizing the energy investment plan, improving the financial sustainability of energy SOEs, and preparing Serbia for the introduction of the EU carbon border adjustment mechanism (CBAM). Finally, the PCI will aid the authorities with important and complex SOE governance reforms, including in the energy sector.

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