Serbia’s economy has strengthened dramatically since the adoption of the economic programme supported by the 2015 stand-by arrangement (SBA), but there have been significant delays in reforms within the public sector, the International Monetary Fund (IMF) said on July 5.

Reforming Serbia's bloated public sector, as well as restructuring and privatising state-owned enterprises, are highly politically sensitive in Serbia since they will involve mass layoffs. Numerous early elections called by the leader of the ruling Serbian Progressive Party (SNS), Aleksandar Vucic, were intended to give the government a strong mandate for unpopular reforms, but Belgrade has still drawn out the reform process. These are some of the tough issues ahead for Serbia's new Prime Minister Ana Brnabic to tackle. 

The IMF completed its seventh review of the precautionary €1.2bn three-year SBA with Serbia, which has been approved in February 2015 and is intended to help Serbia achieve its 2015-2017 economic targets, restore public debt sustainability, strengthen competitiveness and growth and boost the resilience of the financial sector. The deal with the IMF has already been an important driver of Serbia’s economic progress and the thorny issue of public finances stabilisation.

“The economy is still overburdened by a large and inefficient public sector, with too little reliance on the productive private sector. The labour market is characterised by low participation rates, especially of women, and a high degree of informality. Future growth will thus depend on further improving the environment for private sector investment and employment growth,” the IMF said in a statement upon completion of the review.

It added that Serbia needs to improve areas such as streamlining and modernising tax administration, increasing transparency and predictability of public fees and charges, and ensuring a more efficient and independent judicial system.

On the other hand, the IMF noted that Serbia’s economy has strengthened dramatically since the adoption of the economic programme supported by the SBA. The country’s GDP is expected to reach 3% in 2017, while the fiscal deficit should narrow to 1.1% of GDP — the lowest level since 2005 — and public debt is declining faster than projected.

“Contrary to expectations, the larger than planned fiscal tightening has been associated with increased growth, reflecting the confidence engendered by decisively tackling the public debt sustainability concerns. Moreover, unemployment is falling sharply, along with the level of banks’ non-performing loans, while inflation has been maintained at low levels,” the IMF said.

It also noted that Serbia’s central bank, the NBS, has maintained a prudent policy stance and kept inflation under control.

“The sizeable fiscal consolidation under the program and improved policy coordination have supported a substantial easing of monetary policy, reflected in markedly lower lending rates and a recovery of bank credit. Looking forward, inflation is expected to remain within the recently lowered target band of 3±1.5 percent,” the statement said.

If the fund’s management and executive board approves the review in August, Serbia will have available a new tranche of €66.64mn. The Serbian authorities have indicated that they will most likely not use the funding.