The International Monetary Fund has issued the following press release:
Washington, DC: An International Monetary Fund (IMF) mission, led by Jan Kees Martijn, held virtual and in-person meetings with the Serbian authorities during October 11 – 22, 2021, to discuss progress under the PCI. At the conclusion of the mission, Mr. Martijn issued the following statement:
“The IMF mission held productive discussions with the authorities on progress and policies to complete the first review under the PCI. We expect to finalize discussions on the 2022 budget in the near term. Successful completion of the review is subject to meeting the remaining program conditions, and approval by the IMF Management and Executive Board. Consideration by the Board is tentatively scheduled for December 2021.
“An economic recovery in Serbia is underway supported by the authorities’ substantial policy response. Despite the recent pick-up in COVID-19 cases, GDP growth is projected at 6.5 percent in 2021 and at 4.5 percent in 2022. Headline inflation increased to 5.7 percent in September, driven by a low-base effect and temporary factors including rising energy prices and higher unprocessed food prices due to drought. Core inflation has remained relatively stable. While risks are elevated, inflation is expected to stay above the upper bound of the NBS target band in the remainder of 2021 and return within the target band in 2022. The current-account deficit is projected to narrow to about 4 percent of GDP this year and remain fully financed by net FDI inflows. The banking system has remained stable, liquid and well capitalized. The exchange rate has remained stable.
“In light of the rise in inflation and its uncertain outlook, also present in many other countries, the National Bank of Serbia (NBS) appropriately tightened monetary conditions in early October by raising the average repo rates within the interest rate corridor while keeping the policy rate unchanged. The NBS should continue close monitoring of the inflation outlook and stand ready to respond as needed.”
“Fiscal performance has been strong in 2021, boosted by an exceptional increase in tax revenues amid strong economic activity. Under the new supplementary budget, a part of the revenue overperformance will finance additional much-needed investment spending. All considered, the 2021 government deficit is projected to decline to 4.9 percent of GDP, 2 percentage points of GDP lower than initially expected, and will limit the increase in public debt resulting from the pandemic crisis.
“Rising international energy prices present risks to inflation and economic growth. The current system of partially regulated energy prices in Serbia helps address the immediate negative impact on households. Possible measures to cushion adverse long-term effects of sudden energy price hikes on businesses should be limited in time and scale, transparent, and non-discriminatory, based on objective criteria. Additional fiscal risks from SOEs need to be avoided. Furthermore, efforts to promote energy efficiency should continue. If higher international energy prices were to persist, the increases should be passed on throughout the economy while protecting vulnerable households.
“The mission agreed with the authorities on key parameters of the 2022 budget that is currently under preparation. Considering the ongoing economic recovery, it would be appropriate to narrow the 2022 fiscal deficit to 3 percent of GDP, putting public debt on a clear downward path, thus rebuilding room for maneuver to deal with future shocks. Public sector wage increases should be limited, and structural pension increases be guided by the existing indexation formula. It is important that the budget continues to ensure adequate room for healthcare and maintains capital expenditures above historical levels to address Serbia’s sizeable infrastructure needs and support a green recovery. Approval of a budget with a deficit and primary spending level along these lines will be a prior action for the first review under the PCI.
“Structural reforms continue to advance but important reforms remain to be implemented. Progress has been made in privatizing Petrohemija, improving fiscal reporting, strengthening fiscal risks management, and enhancing state aid control. Implementation of the new capital market development strategy will be important to support domestic investment. We welcome the authorities’ commitment to address the outstanding reform needs, including by introducing a new payroll information system, anchoring medium-term fiscal discipline with a new set of fiscal rules, continuing implementing the new SOE ownership strategy, and ensuring a green recovery.
“The mission is grateful for the authorities’ close cooperation.”