IMF Concludes 2023 Article IV Consultation and First Review with Serbia

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the 2023 Article IV consultation[1]and first review of the Stand-By Arrangement with the Republic of Serbia. An additional SDR164 million (over €200 million) is available to purchase, which would bring cumulative drawing to SDR949 million (around €1.2 billion).

Over the last decade, Serbia has, despite external shocks, achieved impressive economic results reflecting its strong economic policies. Such policies supported strong growth, low inflation, and declining public debt. As a result, incomes rose, employment increased, and poverty declined. Large and diversified FDI inflows more than covered the current account deficit. The Covid-19 pandemic affected growth, but the economy quickly recovered in 2021 with the support of a strong package of policy measures.

Nevertheless, spillovers from Russia's invasion of Ukraine and domestic problems, primarily in the energy sector, hit the economy hard. A sharp increase in international energy prices, domestic electricity production problems, and tightening global financial conditions led to an increase in fiscal and external financing needs in 2022. Under a Fund-supported Stand-By Arrangement (SBA), macroeconomic imbalances have already started to decline, and foreign exchange reserves are at an all-time high.

Headline inflation, however, at 15 percent in May, remains well above target and core inflation remains in double digits. Conditional on tighter monetary policy, which likely requires further policy rate increases, inflation should decline to around 8 percent by the end of the year and is projected to return to within the National Bank of Serbia's target band in 2024. The projected fiscal deficit, which is not expected to exceed 3 percent of GDP in 2023, will support disinflation and further public debt reduction.

Growth is expected to decline to 2 percent in 2023, as tighter monetary and fiscal policies, still-high inflation, and weak external demand and tightening global financial conditions all weigh on activity. Over the medium term, growth should return to potential of around 4 percent. The current account deficit is expected to narrow to around 4½ percent of GDP as energy import prices fall and export volumes continue to grow.

Following the Executive Board's discussion, Mr. Bo Li, Deputy Managing Director and Acting Chair of the Board, issued the following statement:

Tighter monetary policy is appropriate to address the challenging high inflation environment, support dinarization, and further strengthen reserves. While banks remain resilient, continued close monitoring is needed, given rising interest rates and risks from global financial turbulence. Steps to close remaining regulatory and supervisory gaps with the EU and support deeper capital markets are important.

The tight fiscal stance is supporting disinflation and helping to reduce public debt. The authorities have made strong progress on fiscal-structural reforms, including related to investment and risk management. Going forward, it will be important to adhere to the new fiscal rule, avoid ad hoc spending measures, and ensure that future fiscal overperformance is saved or used for priority investments.

Energy sector reform remains essential. Ongoing electricity and gas tariff hikes have helped to reduce fiscal subsidies and will be critical for financing essential energy investments over coming years. The new State-Owned Enterprise (SOE) law, which is aligned with OECD best practices, provides a strong foundation for governance reform in the energy sector and beyond. In parallel, considerable progress is being made in improving the structure and management of energy SOEs.

The authorities' structural reform measures to improve the business environment are important, including strengthening the rule of law, improving the efficiency of the judicial system, and strengthening governance and anti-corruption.