Press Release No. 05/108

Corrected Press Release: Statement by the IMF Resident Representative in Serbia Montenegro

May 12, 2005

The following statement was issued in Belgrade by the IMF Resident Representative after a staff mission:

"During the last few days, a staff team of the IMF held discussions with the governments of Serbia and Montenegro on the fifth review of economic performance under the Extended Arrangement.¹ The governments have strengthened their program of macroeconomic adjustment and structural reform to lower inflation and improve productive capacities and competitiveness. This should also result in a noticeable decline of the troubling current account deficit, and reinforce investment led growth and sustainable employment creation. Based on the strength of the reform package, the staff will support ad referendum the governments request to the Board of the IMF for an extension of the current arrangement which is needed to successfully complete the remaining reviews. Program documents will be finalized over the next few days and are scheduled to be presented to the Board of the IMF in late June.

"The discussions in Belgrade during the last days focused on the role of fiscal and monetary policies to slow down the strong growth in demand, and in what manner structural policies and privatization would be stepped up to make the economy more efficient and facilitate the entrance of fresh investment and management expertise into Serbia's productive sector. The mission also noted with serious concern the rapidly rising private sector debt accumulation and the need to address this with adequate prudential policies, including in the area of leasing.

"The Serbian budget deficit was significantly adjusted in 2004, but additional efforts are needed to slow demand growth and make further progress towards the medium-term goal of reducing the size of the state and improving the composition of public spending. This will entail further efforts in increasing the productivity of public employment such as in the civil service and the health care and education sectors, as well as to tackle critical medium-term issues such as the reform of the pension system to put it to a more sustainable footing.

"The Serbian National Bank will further tighten monetary policy by increasingly relying on indirect monetary instruments such as outright sales and repo operations. This is a welcome development as it improves the effectivness of monetary policy and most effectively distributes the adjustment burden. The NBS will also review some prudential policies to address risks related with the increasing indebtedness of the private sector and the risks to debtors caused movements in the exchange rate. The NBS will be mandated to oversee the leasing industry.

"In the structural area, to improve the productivity of assets currently held by the state or under social ownership, the Privatization Agency will continue the fast pace of its successful auctions and tenders. Furthermore, an understanding has been reached that bankruptcy proceedings will be increasingly applied for those companies, which cannot attract a buyer.

"The reform of state-owned utilities will be stepped up. Non-core entities will be spun-off and transferred to the Privatization Agency in the course of this year. A special focus will be on tourism related assets, as investment in this area is expected to create already in the relative near term a positive economic and employment impact. The government will also start with the privatization of some core businesses. In order to address the important investment needs in the country's refineries, the government plans to sell a majority stake in them to a qualified strategic investor in the first half of next year which is expected to take over management control.

"In Montenegro, the mission commended the government for their continued good efforts in lowering the current account deficit by means of tight fiscal policies and structural reform. The mission stressed the importance of making good use of the privatization proceeds and agreed that a reduction of the domestic debt burden and an increase in reserves are appropriate. External balances show signs of improvements, but the mission has cautioned the authorities to continue to closely monitor macro-economic developments. The continuing civil service reform efforts are important and the preparation of a multi-year investment plan is a key necessity for successful budget planning."