The International Monetary Fund (IMF) has reported higher confidence and a return to above pre-crisis growth levels in Serbia, but warned on August 30 that Belgrade needs to build stronger institutions and make more progress on structural reform agenda to put the country on a faster convergence path with the EU.

The fund completed its seventh review of the precautionary €1.2bn three-year Stand-By Arrangement (SBA) with Serbia on August 30. The SBA, approved in February 2015, 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 programme remains on track and is supporting improved confidence and stronger growth. Real GDP is now above pre-crisis levels and labor market conditions are firming, while inflation remains anchored within the target band and the current account deficit has narrowed,” said Tao Zhang, the IMF’s deputy managing director and acting chair.

GDP in Serbia increased by 1.3% y/y in the second quarter of 2017, the Serbian Statistical Office announced in a flash estimate released on July 31. This followed growth of a real 1.2% y/y in the first quarter of the year.

Serbia’s economy has been growing since the second quarter of 2015, after it previously contracted as a result of the devastating floods that hit the country in May 2014. It accelerated to 2.8% in 2016 – its fastest pace since 2008.

Meanwhile, consumer price inflation (CPI) increased by 3.2% y/y in July but also decreased 0.4% m/m, according to statistical office data. 

“Strong revenue performance has supported an important fiscal consolidation and allowed for much less expenditure contraction than originally envisaged. However, containing non-discretionary current spending remains an important priority to support the needed debt reduction while creating fiscal space for higher capital spending and potentially for targeted reductions in tax burdens,” Zhang added in the statement issued on August 30.

Serbia managed to significantly improve its fiscal situation thanks to the SBA. The consolidated budget surplus stood at RSD44.15bn (€367.81) in January-June, RSD80bn more than planned under the SBA, the latest finance ministry data published on July 26 showed.

The budget deficit for 2017 is expected be less than €150mn, well below the official €600mn target planned by the government and the IMF. Thus, local experts suggest the country should secure another arrangement with the IMF in order to continue such results after the current SBA ends in February 2018.

However, according to Zhang, despite the achieved results, building stronger institutions and further progress on implementing the structural reform agenda are needed to improve economic efficiency, bolster private sector-led growth, and put Serbia on a faster convergence path to create a platform for EU accession.

He also said that reforms in areas that have faced delays – modernising education, strengthening tax administration, and restructuring of state-owned enterprises and utilities – should be carried out expeditiously.