IMF approves €1.2bn stand-by arrangement with Serbia

By bne IntelliNews February 24, 2015

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The International Monetary Fund (IMF) has approved a €1.2bn stand-by arrangement with Serbia, aimed at restoring the health of Serbia's public finances and the resilience of its financial sector.

The Serbian government believes the IMF stamp will help convince investors of its fiscal consolidation efforts, and plans to treat the programme as precautionary. Prime Minister Aleksandar Vucic has said Serbia did not secure the arrangement to raise money, but needs it for security, to attract investments and as a guarantee that it is on the right way to reform.

Among the main pillars of the programme is an agreement to resolve the status of state-owned enterprises and reducing the government's fiscal exposure to them. In this light, there were fears that the recent failure of the privatisation of troubled steel mill Zelezara Smederevo to US firm Esmark could have delayed the IMF approval.

The fund's first deputy managing director and acting chair, David Lipton, said in a statement following the approval of the deal by the executive board on on February 23 that the wide-ranging reform of state-owned firms, especially large ones, will be critical for reducing state aid and limiting its impact on the budget.

"Serbia’s high and rising public debt calls for fiscal consolidation in the period ahead," Lipton said. "The authorities’ fiscal package, which aims to place the debt-to-GDP ratio on a downward path by 2017, is appropriate. The focus on containing mandatory expenditure, reducing state aid, and minimising fiscal risks arising from state-owned enterprises is warranted."

Lipton pointed out that a healthy financial sector would safeguard the economic recovery, noting that Serbia should undertake special diagnostic studies to verify the health of its banks and create a comprehensive strategy to address the high level of non-performing loans (NPLs).

The Serbian economy contracted by 2.0% last year following the devastating floods in May and is expected to shrink by a further 0.5% in 2015 as the flood recovery continues and the government embarks on its ambitious fiscal consolidation. The IMF added that the recession in 2014 was the third in the last six years.

At the same time, the fiscal deficit rose to 6.6% of GDP in 2014 because of higher state aid to loss-making enterprises and mandatory spending. As a result, public debt climbed to 70% of GDP at the end of last year and is expected to continue rising until 2017 when the current reforms should start showing results.

To address these serious fiscal imbalances and structural weaknesses, Serbia and the IMF drafted the stand-by arrangement on three main pillars.

The first of these is strong fiscal consolidation over the programme period and rebalancing of the policy mix. The fiscal adjustment, already initiated in late 2014, is largely based on curbing mandatory spending and reducing state aid to state-owned enterprises. The tighter fiscal stance will create space for easing of monetary policy, which will foster credit growth to the economy.

Secondly, the strengthening of the financial sector. The program aims to support financial sector stability and resilience and improve financial intermediation. While the banking sector (composed mostly of foreign-owned banks) has remained adequately capitalised and highly liquid, NPLs are a significant challenge. Addressing NPLs will be essential to improve the creditworthiness of potential borrowers and recovery of credit to the economy, which has been contracting until recently.

The third pillar is boosting competitiveness and growth. Structural reforms are essential to enhance Serbia’s growth potential, the IMF says. There are three broad priorities to be implemented over the medium term: job creation, improvement of the business environment and competitiveness, and the reform of state-owned enterprises, with the aim of significantly reducing the number of these enterprises (a first group of about 500 companies is currently slated for resolution or privatisation). 

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