- The Serbian authorities and IMF staff reached staff-level agreement on the third 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 June 2024.
- Macroeconomic outturns under the program remain strong, with growth recovering, a solid fiscal position, ongoing disinflation, record-high reserves, and a strong labor market.
- The "Leap into the Future-Serbia 2027" development plan envisages a large increase in public infrastructure investments. Prudent fiscal management and medium-term investment planning both remain critically important.
Washington, DC: An International Monetary Fund (IMF) mission, led by Donal McGettigan, held in-person meetings with the Serbian authorities during March 14-26, 2024 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 third review under the Stand-By Arrangement (SBA). The program remains on track with all end-December 2023 quantitative targets met, and all end-March 2024 indicative targets expected to be met based on available data. The structural reform agenda is advancing. 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 June 2024. About EUR 400 million (SDR 316.46 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 continue treating the SBA as precautionary.
"The Serbian economy has been preforming well under the Fund-supported program, despite the challenging global and regional environment. Macroeconomic outcomes in 2023 exceeded expectations and are expected to remain strong in 2024. Growth is projected to increase to 3.5 percent in 2024, and to 4.5 percent in 2025, as domestic demand picks up. Lower regional energy prices and resilient exports supported a sharp narrowing of the current account deficit to 2.6 percent of GDP in 2023. For 2024, it is projected to widen moderately as investment and private consumption pick up. Thanks to continued strong FDI inflows, foreign exchange reserves now exceed EUR 25 billion, an all-time high. Inflation is declining and is expected to fall within the National Bank of Serbia's target range by summer of 2024. Financial stability has been maintained. With solid revenue performance and falling support to the energy state-owned enterprises, the fiscal deficit narrowed to 2.2 percent of GDP in 2023 and public debt fell to below 53 percent of GDP.
"Risks to Serbia's economic outlook include geopolitical and energy sector developments, uncertainties over trading-partner growth, and further global financial market instability. 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 and close Fund relations, accompanied by continued prudent policies, provide important additional buffers.
"Going forward, and in line with the commitments under the SBA, macroeconomic policies should remain geared toward supporting external and fiscal sustainability and ensuring adequate buffers to deal with future shocks, building on the good progress achieved thus far under the program.
"The existing monetary policy stance is appropriate and is consistent with ongoing disinflation. Although disinflation has outpaced earlier projections, it would be prudent not to loosen monetary policy prematurely given remaining inflation risks, including the tight labor market.
"The financial sector appears to be stable, yet continued vigilance is required given the high interest rate environment. The temporary regulatory measures adopted in 2022-23 should be allowed to lapse as scheduled at end-2024. A phased-in approach to the treatment of foreign exchange positions under the new Net Stable Funding Ratio which allows time for bank feedback and refinements if needed is appropriate.
"The Leap into the Future—Serbia 2027" development plan envisages large public infrastructure investment increases over coming years. Prudent fiscal management and medium-term investment planning remain critically important. Low fiscal deficits should be maintained to consolidate Serbia's gains in reining in public debt and rebuilding external and fiscal buffers. While critical infrastructure gaps exist, current public investment is relatively high and any additional investment spending should be carefully prioritized and phased in, considering projects' costs and benefits and broader macroeconomic considerations. We urge the authorities to increase investment transparency and to fully operationalize the public investment management framework to underpin investment quality.
"For 2024, a fiscal deficit of 2.2 percent of GDP is consistent with SBA commitments. Any revenue overperformance and underutilized contingency reserves in the budget may be used to further increase capital spending above the budgeted envelope of about seven percent of GDP, including those related to Expo 2027. Untargeted transfers should be avoided.
"We welcome ongoing efforts to improve public workforce planning, medium-term budgeting, and fiscal risk management. The ongoing modernization of the tax administration should be underpinned by a new HR strategy and accelerated hiring to ensure adequate staffing and preempt risks to revenue collection from the forthcoming retirement wave.
"Energy sector reforms should continue. We welcome the authorities' commitment to remove energy price controls for the non-regulated sector. This should be followed by the necessary revisions to the electricity and gas pricing systems to ensure financial sustainability of the energy state-owned enterprises and their ability to finance much-needed investment projects. Delivering on a broader EPS restructuring plan to make tangible changes to the company's operations is critically important.
"It is important to continue preparing secondary legislation to make the new landmark SOE governance law operational by September 2024. The Ministry of Economy should prioritize fully staffing all needed internal structures so that it can assume its expanded responsibilities under the SOE governance law.
"The IMF team would like to thank all their counterparts for the open and constructive discussions."
