Serbia’s 2013 budget deficit (including public bank resolution costs, arrears and payments of called guarantees) will rise to 8.0% of GDP from an estimated 7.8% of GDP in 2012 amid the absence of additional budget consolidation measures, lower tax revenue and unbudgeted spending, an IMF mission said in a statement.
The statement was issued following the end of the 2013 Article IV mission's visit to Belgrade in May 8-20. Serbia’s public debt will also increase to 65% of GDP in 2013 from 62% a year earlier, well above the legal ceiling of 45% of GDP, the IMF added.
The Serbian finance ministry recently proposed a set of measures, including adjustment of the wage tax and social contribution rates and expenditure cuts to help curb the budget deficit. The government measures, however, will reduce the deficit by just 1% of GDP, the IMF said.
The Serbian authorities, therefore, should identify additional budget consolidation measures of 1% of GDP in 2013 while a cumulative adjustment effort of at least 7 % of GDP over the medium term would be needed to reduce public debt to 45% of GDP by 2020, the IMF underscored.
The fiscal consolidation efforts should focus on strict expenditures control and on adjusting wage and pension bills, the fund added. In addition, revenue measures should also be introduced in order to broaden the tax base. The reduced VAT rate could be upped from 8% to 10% in line with the increase in the main rate in October 2012 (from 18% to 20%), the IMF advised.
The fund underscored that Serbia’s banking sector is stable and well capitalised while NPL provisioning is high. Nevertheless, the IMF mission warned that recent bank resolution cases suggest that weaknesses persist in state-owned banks. Furthermore, credit growth remains subdued despite abundant liquidity in the banking system due to high non-performing loans (NPLs), at close to 20% of total loans at end-March 2013.
The Serbian economy is projected to expand by 2.0% in 2013 after contracting by an estimated 1.8% in 2012, supported by rising production of Fiat’s Kragujevac-based plant and better agricultural performance. Inflation is also expected to return within the central bank’s target band of 2.5%-5.5% by end-2013. The country’s export led recovery however remains subject to numerous risks stemming from a weaker euro area recovery, while higher global risk aversion could also increase the cost of financing and heighten rollover risks, the IMF said.
Serbia’s growth model should reportedly rebalance towards exports, via implementing structural reforms to improve the country’s competitiveness and capacity to attract investments in tradable sectors. Among key structural reforms, the IMF recommends labour market, regulatory and public enterprise reforms.
Serbia hopes the IMF will return in the autumn to continue talks on a new precautionary agreement which could serve as additional support to macroeconomic stability and a trigger for a more positive perception of Serbia. The fund cancelled in February 2012 Serbia's previous EUR 1bn loan deal over signs of fiscal slippage.
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