IMF Completes Second Review Under Policy Coordination Instrument and Modification of Targets for Republic of Serbia

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Second Review Under the Policy Coordination Instrument (PCI)[1]for the Republic of Serbia.

The PCI was approved on June 18, 2021 (seePress Release No. 21/189) and aims at supporting the recovery from the pandemic, maintaining macroeconomic stability, and anchoring the medium-term fiscal policy framework, while pushing ahead with structural reforms to deliver more inclusive and sustainable growth.

The war in Ukraine and an energy crisis have disrupted the strong recovery from the COVID-19 pandemic. Following economic growth of 7.4 percent in 2021, growth in 2022 is projected markedly lower at 3.5 percent, dampened by the impact of high inflation on consumer demand, curtailed trade with Russia, and lower external demand. Driven by soaring global food and energy prices, inflation has increased to 10.4 percent in May 2022, while core inflation remained lower at 6.3 percent. Specific challenges arose in the energy sector when shortfalls in domestic electricity production coincided with rising global energy prices in the 2021-22 winter, increasing total energy costs by about 2 percent of GDP.

Faced with these new shocks, the authorities acted swiftly to preserve financial stability, help companies navigate the international sanctions regime and supply chain disruptions, mitigate the pass-through of high global commodity prices through regulation, and provide financing for energy imports. The authorities have also started to secure energy supply and address the medium-term reform needs in the energy sector. Thus far, higher than budgeted tax revenue has covered the new spending measures. The monetary policy rate has been increased three times since April in response to continued high inflation.

Risks to the near-term outlook remain elevated and mostly to the downside. They include a potentially prolonged war in Ukraine with further pressures on energy and commodity prices, supply chain disruptions, and lower external demand, as well as continued production shortfalls in the energy sector.

Policy priorities have shifted again to supporting the economy in a crisis situation, while the economic policy objectives supported by the PCI remain an appropriate anchor. Provided that global inflation moderates, inflation should return to within the NBS target band over the medium term.

At the conclusion of the Board discussion on the second review of the PCI for Serbia, Mr. Kenji Okamura, Deputy Managing Director and Acting Chair made the following statement:

"Serbia has demonstrated its resilience during the Covid-19 pandemic, but the war in Ukraine, high inflation, and the energy crisis pose new challenges. The authorities' policies have helped mitigate the immediate impact of these shocks and preserved macro-financial stability. Nevertheless, the near-term outlook is subject to downside risks and high uncertainty.

"Supported by strong revenue collection, the fiscal deficit target of 3 percent of GDP for 2022 remains appropriate and feasible. Fiscal support for the energy sector in the past winter amidst soaring import prices and electricity production outages helped maintain energy supply. Should economic disruptions warrant further support to affected groups or activities, it should take the form of targeted measures and be accommodated through spending reprioritization.

"Reforms of the energy sector are urgently needed, including to restore reliable supply and ensure cost recovery. A strategy for the state-owned power company Elektroprivreda Srbije (EPS), and timely adoption of the National Climate and Energy Plan will provide an essential framework for energy investments in particular in renewable sources.

"Amidst ongoing global and domestic inflationary pressures, monetary policy tightening has rightly continued to curb inflation expectations and help bring inflation back within the inflation band over the policy horizon.

"Structural reforms should continue to underpin medium-term growth. The new fiscal rules, expected to be launched with the 2023 budget, will provide an important anchor for medium-term fiscal discipline. The planned primary dealer system will support capital market development."