IMF praises Serbia's progress and raises GDP forecast

By bne IntelliNews September 2, 2015

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The International Monetary Fund (IMF) has given Serbia a positive assessment under its regular review of its €1.2bn three-year stand-by arrangement, and upgraded its forecast for GDP growth this year from a fall of 0.5% to a rise of 0.5%.

“Serbia has returned to positive economic growth, employment is rising and unemployment falling. Improved confidence has also helped Serbia avoid adverse spillovers from developments in Greece or in emerging markets in recent months. This somewhat improved economic outlook reflects the impact on domestic demand of lower oil prices and stronger-than-expected private sector wages, as well as a better export performance,” the IMF said in a press release after the 10-day mission was completed. 

Statistical Office data released on August 31 showed that Serbia's GDP in the second quarter of 2015 increased by 1% compared to the same period in 2014, when the country was hit by devastating floods that negatively affected the energy sector.

GDP growth on the production side was mostly attributed to the vigorous recovery of industrial production and construction, the Ministry of Finance said in August. The growth in Q2 2015 came after a decline of 1.8% in Q1. 

The IMF mission said Serbia's fiscal performance in the first half of 2015 was strong. The general government deficit remained considerably lower than projected, primarily because of improved revenue collection, but also because of a shortfall in public investment, while one-off revenues made sizable contributions and stronger-than-projected tax collections are encouraging.

In first half of 2015, Serbia recorded a budget deficit of RSD35.3bn (€294.17mn), significantly lower than the RSD96.3bn (€802.5mn) envisioned under the agreement. 

The IMF announced that the fiscal overshoot in 2015 will be saved for debt reduction. Serbia’s public debt rose to 72.3% of GDP on July 31, amounting to €24.44bn. The Serbian government aims to achieve a public debt of 45% of GDP within the next few years, and has been implementing fiscal consolidation measures that included cuts in public sector wages and pensions in November 2014, the reduction of public sector employees, and restructuring of public enterprises, as well as the repaying of debts to foreign creditors, to try to help achieve this goal. According to James Roaf, the head of the IMF's delegation, the programme is delivering positive results and debt could be expected to start falling early in 2017.

The IMF mission warned that the steadfast implementation of fiscal policies that Serbia committed to in the programme, including public employment rightsizing, will be crucial to keeping current expenditures within the programme targets in the remainder of 2015 and beyond.

“The authorities should strengthen the implementation of reforms of state- or socially-owned enterprises, including through privatization, restructuring, or bankruptcy. The authorities should also step up other structural reforms to stimulate private sector investment and growth. In this regard, the mission welcomes the authorities’ reaffirmed determination to press ahead with a broad-based structural reform agenda,” the IMF said.

Serbia has been trying to restructure some 500 public companies and has promised to stop financially supporting them.

During the first review of the stand-by arrangement in June, the IMF asked Belgrade to implement a comprehensive strategy to resolve the high number of non-performing loans (NPLs), assist economic recovery and reduce financial vulnerabilities.

Earlier in August, the National Bank of Serbia introduced a strategy for reducing NPLs, which the IMF welcomed during its second review. The bank also launched special diagnostic studies of its asset quality. According to the IMF, those are significant steps toward strengthening financial sector stability and improving financial intermediation.

The IMF mission emphasised that inflation remains low in Serbia as a result of low import prices, delays in administered price adjustments, and economic activity remaining below potential. In the medium term, growth is expected to accelerate, depending on continued sound macroeconomic policies and stepped-up structural reforms.

Under public pressure, officials said they would open talks about increasing public sector wages and pensions, but these talks have been postponed until November, when the IMF's third review will be conducted and the budget for 2016 will be analysed.

The completion of the review will make an additional €147mn available to Serbia under the stand-by arrangement, bringing the total funds available to €528mn. Serbian authorities have indicated that they do not intend to draw on the resources available under the arrangement, the IMF said.

The €1.2bn three-year stand-by deal Serbia signed with the IMF in February is intended to support Serbia's 2015-2017 economic targets, restore public debt sustainability, strengthen competitiveness and growth, and boost the resilience of the financial sector.


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