The International Monetary Fund (IMF) increased its projection for Serbia's 2016 and 2017 economic growth to 2.7% and 3% respectively on November 1, the IMF said in a press release issued after discussions on the sixth review of Serbia’s precautionary €1.2bn three-year Stand-By Arrangement (SBA).

According to the IMF’s latest World Economic Outlook (WEO) released on October 4, Serbia’s economy was expected to grow by a real 2.5% in 2016 and keep accelerating to 2.8% in 2017. The Fund now expects Serbia’s real GDP to accelerate as strong performance under the country’s economic programme continues, while growth is strengthening and labour market indicators show noticeable improvement.

GDP in Serbia increased by 2.5% y/y in the third quarter of 2016, the Serbian Statistical Office announced in a flash estimate released on October 31. Previously, the country’s GDP increased by 2% y/y in the second quarter of 2016, continuing the positive trend since Q2 2015. Serbia’s GDP contracted in 2014 and the first quarter of 2015, as a result of the devastating floods that hit the country in May 2014.

Improvements since then have been partially the result of the SBA, which is intended to support the achievement of Serbia's 2015-2017 economic targets, restore public debt sustainability, strengthen competitiveness and growth, and boost the resilience of the financial sector.

The Fund also announced on November 1 that it projects Serbia’s general government deficit at 2.1% of GDP in 2016 since robust fiscal performance continues, driven by stronger than expected revenues, while expenditures stayed within the programme targets. The fiscal deficit is expected to decline to 1.7% of GDP in 2017.

Serbia’s general government budget deficit totaled RSD4.46bn in January-September, significantly lower than the RSD115.2bn planned under the SBA, the ministry of finance announced on October 28.

In 2015, Serbia managed to reduce its budget gap to 3.7% of GDP from 6.6% in 2014. During the year, Serbia’s consolidated budget gap stood at RSD148.6bn and remained below the ceiling envisaged under the SBA.

Furthermore, according to the IMF’s latest conclusions, Serbia’s public debt is falling a year ahead of schedule, and is projected to end the year below 74% of GDP.

General government public debt decreased slightly to RSD3,037.2bn (€24.65bn) at end-August, from RSD3,052.88bn or 73.6% of GDP on July 31, preliminary data from the ministry of finance’s public debt administration published on September 26 showed.  

“In view of this over-performance, the mission agreed with the authorities’ plan to use part of the fiscal space in 2016 to cover some one-off expenditures, including a bonus for pensioners and the resolution of historical arrears of state-owned enterprises,” the IMF said on November 1.

The Serbian government announced a modest raise in public sector wages and pensions on October 30, after the IMF mission agreed to the raise. In November 2014, Serbia’s government cut public sector wages and pensions by approximately 10%, as agreed with the IMF before the SBA was approved in February 2015. A year later, in November 2015, the IMF approved the Serbian government’s request to make a modest raise in public sector wages and pensions as of January 2016, but this did not negatively affect the budget.

“The mission also reached an agreement with the authorities on the key parameters of the 2017 budget. The priority is to continue with a gradual fiscal consolidation and to ensure public debt is put on a firm downward trend. Within this framework, the mission reached agreement with the authorities on a targeted public wage and pensions increase,” the Fund added.

The IMF is still pushing for reforms within state-owned enterprises, which has been the slowest and the most complicated part of the implementation of the SBA.

“In order to ensure a durable fiscal improvement and achieve strong, inclusive growth over the medium term, the authorities need to decisively tackle structural challenges. The public sector reforms must be accelerated, to deliver better public services while contributing to the fiscal consolidation process. In particular, reforms of the education system are well overdue,” IMF said, adding that decisive actions are also needed to end the drain on public resources by large utility companies and other state-owned enterprises.

The completion of the review will make an additional SDR54.57mn (€68.53mn) available to Serbia under the SBA, bringing the total funds available to SDR662.58mn (€832.14mn). The Serbian authorities have indicated that they do not intend to draw on the resources available under the arrangement.