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Serbia’s IMF Program on Track Feature

Serbia and the IMF have reached a staff-level agreement on the third review under the Stand-By Arrangement, pending approval by the IMF Executive Board in June 2024

An International Monetary Fund (IMF) mission, led by Donal McGettigan, held in-person meetings with Serbian authorities from 14th to 26th March 2024 to discuss Serbia’s progress under the Stand-By Arrangement (SBA). Following these discussions, Mr. McGettigan issued a statement announcing a staff-level agreement on the third review of the SBA. This agreement is subject to approval by the IMF Executive Board, which is set to consider it in the second half of June 2024. If approved, approximately EUR 400 million (SDR 316.46 million) will become available to Serbia. Given the strong accumulation of reserves and fiscal buffers, Serbian authorities have expressed their intention to treat the SBA as precautionary.

Mr. McGettigan noted that Serbia’s economy has performed well under the IMF-supported programme, despite a challenging global and regional environment. Macroeconomic outcomes in 2023 surpassed expectations and are projected to remain robust in 2024, with growth expected to rise to 3.5% in 2024 and 4.5% in 2025 as domestic demand increases. The current account deficit sharply narrowed to 2.6% of GDP in 2023, supported by lower regional energy prices and resilient exports, and is projected to widen moderately in 2024 as investment and private consumption pick up. Foreign exchange reserves have reached an all-time high, exceeding EUR 25 billion, while inflation is declining and is expected to fall within the National Bank of Serbia’s target range by summer 2024. The fiscal deficit narrowed to 2.2% of GDP in 2023, and public debt fell below 53% of GDP.

However, risks to Serbia’s economic outlook include geopolitical and energy sector developments, uncertainties over trading-partner growth, and further global financial market instability. Nonetheless, Serbia’s strong foreign exchange reserves, public sector deposits, relatively low public debt, sustainable external debt dynamics, and a well-capitalised and liquid banking system provide significant buffers against these uncertainties. Continued prudent policies, supported by the SBA, offer additional protection.

The existing monetary policy stance is appropriate and supports ongoing disinflation. Although disinflation has outpaced earlier projections, it would be prudent not to loosen monetary policy prematurely due to remaining inflation risks, including a tight labour market.

The financial sector remains stable, but continued vigilance is required given the high interest rate environment. Temporary regulatory measures adopted in 2022-23 should be allowed to lapse as scheduled at the end of 2024. A phased approach to the treatment of foreign exchange positions under the new Net Stable Funding Ratio, allowing time for bank feedback and refinements if needed, is appropriate.

Serbia’s economy shows strong performance under IMF programme, with significant growth, high reserves, and declining inflation

The “Leap into the Future—Serbia 2027” development plan envisions significant public infrastructure investments in the coming years. Prudent fiscal management and medium-term investment planning are critical. Low fiscal deficits should be maintained to consolidate Serbia’s gains in reducing public debt and rebuilding external and fiscal buffers. Given the existing high level of public investment, any additional spending should be carefully prioritised and phased in, considering the costs, benefits, and broader macroeconomic implications. Authorities are urged to increase investment transparency and fully operationalise the public investment management framework to ensure investment quality.

For 2024, a fiscal deficit of 2.2% of GDP is consistent with SBA commitments. Any revenue overperformance and underutilised contingency reserves may be used to further increase capital spending above the budgeted envelope of about 7% of GDP, including expenditures related to Expo 2027. Untargeted transfers should be avoided.

Ongoing efforts to improve public workforce planning, medium-term budgeting, and fiscal risk management are welcomed. The modernisation of the tax administration should be supported by a new HR strategy and accelerated hiring to ensure adequate staffing and mitigate risks to revenue collection from the upcoming retirement wave.

Energy sector reforms should continue, with a commitment to removing energy price controls for the non-regulated sector. This should be followed by necessary revisions to electricity and gas pricing systems to ensure the financial sustainability of state-owned energy enterprises and their capacity to finance crucial investment projects. Implementing a broader restructuring plan for EPS to make tangible changes to the company’s operations is critically important.

It is also crucial to continue preparing secondary legislation to make the new SOE governance law operational by September 2024.

The Ministry of Economy should prioritise fully staffing all necessary internal structures to assume its expanded responsibilities under the SOE governance law.

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