Press Release: Statement by the IMF Staff Mission to Serbia

September 24, 2008

Press Release No.08/221

An International Monetary Fund (IMF) mission, headed by Albert Jaeger, visited Serbia September 17-24, 2008 to review economic developments and prospects. At the conclusion of the visit, Mr. Jaeger issued the following statement today in Belgrade:

"The economy continues to grow strongly and inflation is coming down, but external deficits are rising in an unsustainable way, while global financial conditions are worsening. To ensure macroeconomic stability and address the mounting risks, a strong supplementary budget for 2008 and a much tighter 2009 budget are needed. Hard budgetary choices will have to be made.

"Serbia's impressive economic growth remains unbalanced. Inflation is coming down and growth is expected to remain strong at 6-7 percent in 2008-09, but the economy continues to over-spend, the export base remains small, external private debt is rising, and the current account deficit is set to widen to over 18 percent of GDP in 2008. Serbia as a whole annually spends 500 billion dinars more than it earns, and borrows abroad to do so. The overspending goes mainly to consumption rather than investment, and growth is driven by shopping, banking, and telecoms.

"The government's economic objectives signal its resolve to achieve robust growth, low inflation, and external stability at the same time. But for that, the government needs to implement a comprehensive economic reform strategy, and to implement much tighter fiscal policies. Privatization, enterprise restructuring, and lowering the costs of doing business remain the keys to strengthening the economy's supply side. Deeper EU and regional integration, as well as development of public infrastructure, should help expand trade and attract investment inflows.

"The supplementary budget for 2008 is the first opportunity to build fiscal credibility, following a widening of fiscal deficits over the past two years, and it should not be missed. However, the expensive across-the-board increase in pensions will push the budget further into deficit, which unfortunately can be limited only by under-execution of capital spending.

"Other initiatives under consideration could significantly boost the fiscal deficit in 2009, including (i) raising average pensions to up to 70 percent of average net wages; (ii) increasing public investment on selected road and railway projects; and (iii) various tax cuts. The full effect of these promises could add up to 5 percent of GDP to the fiscal deficit.

"It is clear that hard choices will have to be made, as these initiatives—however desirable—cannot all fit within a responsible budget envelope. To rebalance budgetary policies and create space for much-needed public investment, recurrent spending must be strictly contained. Fiscal policy should aim at stabilizing the economy, reducing external imbalances, and increasing the public sector's spending efficiency to better meet the population's social and infrastructure needs.

"Monetary policy should continue to focus on containing inflation. The National Bank of Serbia has acted decisively this year to tighten monetary policy in the face of the surge in food and energy prices that has affected many other countries. Looking forward, recent declines in agricultural and energy prices point to easing of immediate, mainly supply-driven inflationary pressures. However, risks for missing the 2009 inflation targets are clearly tilted upward, particularly if fiscal and incomes policies remain loose. Moreover, in the context of the ongoing global financial market turmoil, financial stability risks are on the rise, and the NBS' tight prudential stance remains appropriate."


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