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Republic of Serbia: Statement at the Conclusion of an IMF Mission

Press Release No. 16/296 June 21, 2016

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.

An International Monetary Fund (IMF) mission, led by James Roaf, visited Belgrade during June 9–21, 2016, to hold discussions on the fourth and fifth reviews under Serbia’s precautionary Stand-By Arrangement (SBA) with the IMF. At the conclusion of the visit, Mr. Roaf issued the following statement:

“The IMF mission had constructive discussions with the caretaker government led by Prime Minister-designate Aleksandar Vučić, and reached staff-level agreement with the authorities on policies needed to complete the fourth and fifth reviews under the SBA. The agreement is subject to endorsement by the new government; completion of policy actions related to key structural, fiscal, and financial measures; and approval by IMF Management and Executive Board. Consideration by the Executive Board is tentatively scheduled for late August. The completion of the reviews will make an additional SDR 117 million (€147 million) available to Serbia under the SBA, bringing the total funds available to SDR 608 million (€762 million). The Serbian authorities have indicated that they do not intend to draw on the resources available under the arrangement.

“Strong performance under Serbia’s economic program continues. Economic growth is strengthening, supported by robust investment and rising net exports. Inflation has remained low and stable but below target, on account of lower-than-expected imported prices and food prices. The external current account deficit is declining, amid robust exports. We now expect real GDP growth of 2.5 percent in 2016, and inflation of 1.3 percent.

“The authorities have continued to make important progress in fiscal consolidation. The strong fiscal performance of 2015 continues in 2016, and all quantitative performance targets under the program for end-March were met, most by comfortable margins. Assuming continuing improved revenue collection and prudent execution of budget expenditure in the remainder of the year, the general government deficit in 2016 should fall to about 2.5 percent of GDP, compared to the original target of 4 percent of GDP, making another year of significant fiscal over-performance.

“However, important challenges remain to ensure a durable fiscal improvement and put Serbia on a higher medium-term growth path. In the fiscal area, further efforts are needed to put Serbia’s high public debt firmly on a sustainable downward trajectory, while creating space for needed public investment and building buffers for potential fiscal risks. The public sector rightsizing decision of December 2015 has been implemented as planned, and the government is committed to continue public administration reform based on in-depth functional reviews conducted in collaboration with the World Bank. This reform will improve the efficiency of the public sector while contributing to the needed deficit reduction. Strengthening the public investment framework, including careful cost-benefit analysis of all projects and integration with national development priorities, is essential to ensure the efficient use of public resources and to contain related fiscal risks.

“More determined reform is needed of state-owned enterprises (SOEs), including large utility and mining companies. Over many years, the failure to restructure inefficient and unviable SOEs has been a major obstacle to private sector-led growth, and has led to the repeated assumption of liabilities from these companies onto the public debt. Important progress has been made in creating a level playing field between public and private companies and in resolving some of the strategically important SOEs covered by the program. But more decisive restructuring of large SOEs, including EPS, RTB Bor, and Resavica, is needed to deliver tangible benefits. The only sustainable way to protect jobs in SOEs, without relying on repeated bailouts by taxpayers, is to restructure them so as to ensure their commercial viability.

“The IMF mission supports the NBS’s cautiously accommodative monetary policy stance. Scope for further interest rate cuts will depend on the development of inflation expectations, unwinding of uncertainty in international financial markets, and further improvement in the fiscal position.

“The financial sector reform agenda is progressing well, and will contribute to more vibrant economic activity via improved financial stability and intermediation. Last year’s special diagnostic studies of bank asset quality confirmed the financial soundness of all systemic banks, and banks are implementing recommendations to address material weaknesses identified by the studies. The financial sector agenda for 2016 focuses in two areas: first, the reform of state-owned financial institutions; and second, the full implementation of the NPL resolution strategy – which is already contributing to a reduction of the high levels of impaired assets in banks’ loan portfolios.

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