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

  • Serbia’s economic growth rebounded strongly at 7.4 percent in 2021. The war in Ukraine, energy sector challenges and high inflation are expected to lower growth in 2022 to 3.5 percent amid high uncertainty.
  • Monetary policy is being tightened in response to continued high domestic and global inflation.
  • A sound action plan and reforms in the energy sector would provide important assurance for the economic outlook.
  • 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.”


    [1]The PCI is available to all IMF members that do not need Fund financial resources at the time of approval. It is designed for countries seeking to demonstrate commitment to a reform agenda or to unlock and coordinate financing from other official creditors or private investors

    Table 1. Serbia: Selected Economic and Social Indicators, 2018–2024

    2021

    2022

    2023

    2024

    CR 21/272

    Prel.

    CR 21/272

    Proj.

    CR 21/272

    Proj.

    Proj.

    Real sector

    Real GDP

    4.5

    4.3

    -0.9

    6.5

    7.4

    4.5

    3.5

    4.5

    4.0

    4.0

    Real domestic demand (absorption)

    6.5

    6.3

    -0.9

    5.1

    8.5

    4.9

    3.6

    5.1

    4.7

    4.8

    Consumer prices (average)

    2.0

    1.9

    1.6

    4.0

    4.1

    4.9

    9.0

    3.5

    5.9

    3.7

    Consumer prices (end of period)

    2.0

    1.9

    1.3

    7.0

    7.9

    2.5

    8.0

    3.0

    4.3

    3.7

    GDP deflator

    2.0

    2.4

    2.4

    4.9

    6.1

    4.7

    6.8

    3.8

    7.0

    5.2

    Unemployment rate (in percent) 1/

    14.1

    11.6

    10.1

    Nominal GDP (in billions of dinars)

    5,073

    5,422

    5,502

    6,147

    6,269

    6,725

    6,931

    7,295

    7,711

    8,437

    General government finances

    Revenue 2/

    41.5

    42.0

    41.0

    43.6

    43.3

    41.7

    41.3

    41.7

    41.6

    41.7

    Expenditure 2/

    40.9

    42.2

    49.0

    48.5

    47.4

    44.7

    44.3

    43.2

    43.1

    42.9

    Current 2/

    36.4

    36.9

    42.8

    40.3

    39.0

    37.0

    37.5

    36.2

    36.2

    35.9

    Capital and net lending

    4.1

    5.1

    6.1

    8.1

    8.3

    7.4

    6.8

    6.8

    6.6

    6.7

    Amortization of called guarantees

    0.4

    0.2

    0.1

    0.1

    0.1

    0.2

    0.0

    0.1

    0.3

    0.2

    Unidentified measures

    0.0

    0.0

    0.0

    0.0

    0.0

    0.0

    0.0

    0.0

    0.0

    0.0

    Fiscal balance (cash basis, old definition without payment under government guarantees)

    Fiscal balance 3/

    0.6

    -0.2

    -8.0

    -5.0

    -4.1

    -3.0

    -3.0

    -1.5

    -1.5

    -1.1

    Primary fiscal balance (cash basis)

    2.8

    1.8

    -6.0

    -3.1

    -2.4

    -1.2

    -1.3

    0.3

    0.8

    0.6

    Structural primary fiscal balance 4/

    2.9

    1.5

    -4.0

    -3.4

    -2.5

    -1.7

    -1.0

    0.2

    0.7

    0.5

    Gross debt /5

    54.4

    52.8

    57.9

    58.3

    57.2

    56.5

    55.1

    53.9

    50.8

    47.2

    Monetary sector

    Money (M1)

    20.1

    16.3

    36.3

    11.4

    14.5

    9.0

    11.2

    8.6

    11.2

    8.5

    Broad money (M2)

    15.0

    8.8

    18.4

    10.6

    13.0

    8.4

    11.8

    8.1

    7.3

    6.0

    Domestic credit to non-government 6/

    10.1

    9.5

    12.0

    5.8

    9.9

    5.1

    13.5

    4.3

    7.5

    6.6

    Interest rates (dinar)

    NBS key policy rate

    3.1

    2.3

    1.0

    1.0

    Interest rate on new FX and FX-indexed loans

    2.8

    3.1

    3.0

    3.0

    Interest rate on new dinar deposits

    Balance of payments

    Current account balance

    -4.8

    -6.9

    -4.1

    -4.1

    -4.4

    -4.3

    -6.1

    -4.3

    -5.7

    -6.0

    Exports of goods

    35.2

    35.7

    34.4

    39.1

    38.9

    39.2

    38.7

    39.0

    36.7

    36.0

    Imports of goods

    -47.1

    -47.9

    -45.5

    -49.5

    -50.0

    -49.5

    -51.4

    -49.3

    -48.6

    -47.2

    Trade of goods balance

    -11.9

    -12.2

    -11.1

    -10.4

    -11.1

    -10.3

    -12.7

    -10.3

    -11.9

    -11.2

    Capital and financial account balance

    6.7

    10.6

    5.0

    11.1

    8.7

    5.9

    3.2

    6.7

    7.2

    6.9

    External debt (percent of GDP) 7/

    66.1

    65.7

    70.3

    68.4

    71.3

    64.8

    66.2

    62.1

    62.3

    58.0

    of which: Private external debt

    30.9

    31.3

    33.8

    31.1

    32.6

    29.0

    29.0

    27.2

    26.4

    24.4

    Gross official reserves (in billions of euro)

    11.3

    13.4

    13.5

    17.1

    16.5

    18.0

    14.7

    19.5

    15.7

    16.4

    (in months of prospective imports)

    4.8

    6.1

    4.9

    6.0

    5.3

    5.9

    4.4

    5.9

    4.4

    4.3

    (percent of short-term debt)

    195.3

    417.2

    420.7

    523.2

    513.1

    551.4

    458.9

    594.8

    489.5

    510.5

    (percent of broad money, M2)

    52.2

    57.7

    57.3

    65.7

    61.4

    63.6

    49.7

    63.9

    47.5

    45.2

    (percent of risk-weighted metric) 8/

    111.2

    126.2

    125.9

    139.3

    134.0

    138.7

    114.3

    142.4

    113.9

    112.8

    Exchange rate (dinar/euro, period average)

    118.3

    117.9

    117.6

    117.6

    REER (annual average change, in percent;

    + indicates appreciation)

    2.8

    1.0

    1.5

    1.4

    Social indicators

    Per capita GDP (in US$)

    7,252

    7,397

    7,700

    9,012

    9,178

    9,940

    9,597

    10,904

    10,883

    12,145

    Real GDP per capita (percent change)

    5.1

    4.6

    -0.4

    6.9

    8.3

    4.9

    4.0

    4.9

    4.4

    4.4

    Population (in million)

    7.0

    7.0

    6.9

    6.9

    6.9

    6.9

    6.8

    6.8

    6.8

    6.8

    Absolute poverty rate (in percent)

    Sources: Serbian authorities; and IMF staff estimates and projections.

    1/ SORS released revised national accounts in November 2018.

    1/ Unemployment rate for working age population (15-64).

    2/ The GDP series were revised in October 2014 based on ESA 2010 methodology and resulted in an increase of average 7 percent.

    2/ Includes employer contributions.

    3/ Includes amortization of called guarantees.

    4/ Primary fiscal balance adjusted for the automatic effects of the output gap both on revenue and spending as well as one-offs. The calculation of the

    structural balance has been revised to include temporary one-off measures enacted to respond to the pandemic.

    5/ Excludes state guarantees on bank loans under the credit guarantee scheme introduced in response to the COVID-19 crisis,

    estimated at 1.1 percent of GDP as of August 15th 2021.

    6/ At constant exchange rates.

    7/ After CR19/369, domestic securities held by non-residents are included in external debt. Historical data were updated since 2015.

    8/ The risk-weighted metric is IMF’s ARA metric for the fixed exchange rate. Serbia was reclassified as stabilized exchange rate regime in 2019.

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