Statement by the IMF Article IV Mission to Serbia

Press Release No. 07/248
November 7, 2007

An International Monetary Fund (IMF) mission led by Paul Hilbers, Division Chief in the European Department visited Belgrade to conduct the annual Article IV consultation discussions with the Serbian authorities. The mission issued the following statement at the conclusion of its work on November 6:

"Growth is strong and expected to reach about 7 percent in 2007. This is the welcome result of structural reforms and privatization of past years. But it is unbalanced, because it also reflects high domestic demand fueled by large wage increases, credit growth, and expansionary fiscal policy of last year.

"Tight monetary policies have been successful in maintaining low inflation, but high wage growth put pressure on competitiveness. Inflation has come down, despite recent supply shocks and rises in oil and other administered prices. Core inflation—which is targeted by the National Bank of Serbia—declined from 14 percent in 2005 to 6 percent in 2006 and is expected to be about 4½ percent in 2007. Headline inflation went down from 18 percent in 2005 to 8½ percent now. At the same time, real wage increases of 20-25 percent were clearly in excess of productivity growth.

"The current account deficit widened to 15 percent of GDP and private debt more than doubled since 2004. With monetary policy geared toward maintaining low inflation, excess demand translated into a rapid growth of imports. Exports grew equally fast, but they are only half of imports, and their rise largely reflected growth in prices rather than volumes.

"Under current policies, the external deficit will persist and debt will continue to rise. The presently unbalanced policy mix of loose fiscal, tight monetary, and mixed progress in structural policies puts external stability further at risk and dampens growth prospects.

"The problems need to be tackled at their roots:

• Structural reforms and privatization need to be accelerated for better growth, exports, and job prospects.

• Fiscal surpluses are needed in the years ahead, until the effects of structural policies take hold. The focus should be on expenditure adjustment and tight control of public sector wage developments.

• Keep monetary policy focused on entrenching low inflation."



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