The International Monetary Fund (IMF) executive board has completed the third review of Serbia’s economic performance under the €1.2bn three-year stand-by arrangement (SBA) approved in February 2015. According to a December 18 statement, the Fund-supported programme is delivering good results but risks remain.
The IMF has been the main partner of the Serbian government in its effort at consolidation of public finances, as well as to boost economic growth after several years of contraction. After the SBA was secured in February, Belgrade had improved its control over public finances improves. This also contributed to raising trust in the government despite expected job losses as non-performing state-owned companies are restructured or closed down.
The IMF’s latest statement quotes its deputy managing director and acting chair, Min Zhu as saying that under the SBA the country’s economy continues to recover on the back of efforts to strengthen public finances, address structural weaknesses, and improve the business climate.
“However, risks remain. Full implementation of program commitments is needed to achieve program objectives of maintaining macroeconomic stability, restoring public debt sustainability, and strengthening growth potential,” Zhu said.
He added that the fiscal over-performance achieved so far in 2015 is commendable and allows clearance of some past liabilities and inclusion of a modest and targeted increase in public wages and pensions in 2016 budget.
The IMF approved the increase on November 10, a year after the government reduced public wages and salaries approximately by 10%, as one of its first public finance consolidation measures. The raise is conditional on an increase in fuel excises.
However, Zhu warned that placing public debt on a firm downward path requires further structural adjustment of around 1.5% of GDP in 2016–17.
Serbia’s public debt amounted to €24.33bn, 74.1% of the country’s GDP, on October 31.
Serbia’s public debt is more likely to grow after the US Federal Reserve (FED) decided increase the benchmark interest rate by 0.25 percentage points on December 16, as 33.3% of the debt is in US dollars.
“In this regard, the second phase of public sector rightsizing needs to be prepared and implemented expeditiously. In order to improve Serbia’s growth potential, public investment projects need to be well-prioritized and planned, underpinned by feasibility studies and fiscal risk analysis to ensure that projects contribute to growth potential without incurring excessive public debt,” according to Zhu.
The fiscal deficit currently amounts to over 4% of GDP, down from 6.7% of GDP in 2014.
Serbia’s consolidated general government deficit in January-October 2015 stood at RSD63.1bn. This was well below the RSD159.9bn in the same period of 2014. In the first half of 2015, the country recorded a budget deficit of RSD35.3bn, significantly lower than the RSD96.3bn envisaged under the SBA.
According to the Fiscal Council of Serbia, an independent state body, in order to avoid any financial uncertainty or crisis, the fiscal deficit of the general government needs to be reduced by some 3% in 2016 and 2017 - 1.5% each year.
Meanwhile, Zhu said that progress in the financial sector area is encouraging.
“In addition, the coordinated actions across government, the NBS and banks envisaged under the [non-performing loan] resolution strategy will help clear lending channels and reduce remaining vulnerabilities,” he said.
On August 13 the Serbian central bank adopted a strategy for resolving NPLs, in coordination with the IMF, the World Bank and the European Bank for Reconstruction and Development. The strategy aims to resolve the issue of NPLs in a long term and sustainable way. Its goal is also to improve the mechanisms for resolving corporate debt through the court system.
The share of gross non-performing loans (NPLs) held by Serbian banks dropped by 0.8pp to 22% in the third quarter of 2015 after it climbed 1.2pp to 22.8% in the first half of 2015, the central bank announced earlier in December.
After the completion of the third review, the cumulative amount of funding available to Serbia is SDR491.085mn (€627mn). According to the IMF’s press release, the Serbian authorities plan to continue treating the arrangement as precautionary.
During its third review visit to Belgrade, the IMF mission revised its real GDP growth projection for 2015 to 0.75% after, during its second review of the SBA on end of August, it was lifted to 0.5% from -0.5% annual growth envisaged in the SBA.
According to Moody's Investors Service the SBA contributed to Serbia’s GDP growth of 2.2% y/y in real terms in the third quarter of 2015, following 1% y/y expansion in second quarter of 2015.
Moody's announced on December 3 that Serbia 's credit profile (B1 stable) benefits from the SBA signed in February.
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