IMF Completes Second Serbia Stand-By Arrangement Review

• The IMF Executive Board concluded the second review under the Stand-By Arrangement (SBA) with the Republic of Serbia, allowing access to about EUR 400 million. The authorities intend to treat the SBA as precautionary starting from this review, one review earlier than planned.
• Macroeconomic outturns under the program remain strong, with recovering growth, ongoing disinflation, a narrowing current account deficit, and record high foreign exchange reserves. The 2024 budget is appropriately tight while providing room for needed public investment.
• The financial situation of the energy sector SOEs has been stabilized, and structural reforms in the energy sector companies, SOE governance and broader fiscal management are progressing well.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Second Review Under the Stand-By Arrangement (SBA) for the Republic of Serbia. The SBA amounting to about SDR 1.89 billion, or approximately EUR 2.4 billion, was approved by the IMF's Board on December 19, 2022 (see Press Release No. 22/447). With this review, about EUR 400 million (SDR 316.53 million) becomes available. The authorities intend to treat the SBA as precautionary (i.e., to not access the available funds for now) starting from the current review.[1]

Despite a challenging global environment, economic activity is recovering and the labor market is resilient. Growth is expected to reach about 2½ percent in 2023, increasing to 3¼ percent in 2024 as domestic demand recovers. Inflation is declining, falling to 8 percent yoy at end-November 2023. Inflation is expected to return to within the National Bank of Serbia's (NBS) target range by end-2024 assuming continued tight policies. Despite some ad-hoc spending measures, fiscal consolidation continues as agreed under the SBA. The current account deficit has narrowed significantly, foreign direct investment (FDI) remains robust, and gross international reserves have increased during the year (EUR 24.16 billion at end-November 2023) and stand near all-time highs. Financial stability has been maintained.

The 2024 budget envisages a fiscal deficit of 2.2 percent of GDP, consistent with an ongoing tight policy stance and with a view toward reducing the deficit further to 1.5 percent of GDP in 2025 in adherence with the fiscal rule. Public sector wages and pensions will also be increased in line with the fiscal rule. The budget maintains high capital spending to meet sizeable infrastructure needs and does not envisage liquidity support to energy state-owned enterprises (SOEs) barring any large negative shocks. Reflecting these conservative policies, public debt in percent of GDP remains on a downward path.

The program is on track. All quantitative performance criteria and indicative targets were met, and structural reform momentum has been maintained. Following three rounds of energy tariff increases under the program, the finances of the energy SOEs have improved, and fiscal risks have moderated. Advancing the structural reform agenda centered on energy sector and SOE governance will help address Serbia's remaining vulnerabilities and support long-term growth.

[1] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.