IMF Approves €402.5 million Stand-By Arrangement for Serbia

Press Release No. 09/12
January 16, 2009

The Executive Board of the International Monetary Fund (IMF) today approved a 15-month SDR 350.8 million Stand-By Arrangement (about €402.5 million or US$530.3) to support the authorities' program aimed at maintaining macroeconomic and financial stability. The approval makes SDR 233.9 million (about €268.4 million or US$353.3) immediately available. However, the Serbian authorities intend to treat the arrangement as precautionary, and not to draw on Fund resources unless the need arises.

The authorities' program aims at safeguarding macroeconomic and financial stability, in view of the global financial turmoil. It focuses on measures aimed at maintaining market confidence, complementing the large buffers in the financial system. Policies include upfront fiscal restraint, with the 2009 deficit limited to 1¾ percent of GDP; containing inflation, while maintaining a managed float to facilitate external adjustment; strengthening crisis preparedness; and reforms to boost the economy's supply side.

Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, issued the following statement:

"Serbia's recent stretch of robust growth and moderate underlying inflation—underpinned by large capital inflows—has been accompanied by the build-up of sizable external imbalances and vulnerabilities. With the global financial turmoil spilling over to Serbia, a rebalancing of the economy through a sharp slowing of credit and domestic demand seems necessary.

"The authorities' program—supported by the SBA—is an appropriate response to the current challenges, and seeks to safeguard macroeconomic and financial stability through a comprehensive policy package. Determined implementation of this program should poise the Serbian economy to resume more balanced and sustained real income growth.

"Strong fiscal measures are being taken to achieve the tighter 2009 deficit target. Because of the procyclical fiscal policy stance since 2006, limited budgetary financing options, and the need to ensure the credibility of the program, there is no scope now for countercyclical fiscal loosening. The slowdown in public wage and pension growth, as well as other savings measures, preserve fiscal space for much-needed infrastructure investment.

"Monetary policy will continue to focus on inflation within a strengthened framework, supported by a managed float with foreign exchange interventions limited to ensuring orderly market conditions. Given the uncertain economic environment, the monetary stance will need to be adjusted flexibly.

"Past prudential policies are now paying off in providing a strong first line of defense against spillovers from the financial turmoil. These policies have succeeded in building large liquidity and capital buffers in the banking system, although they may also have encouraged risky cross-border borrowing. The authorities need to strengthen the financial stability framework, mainly by improving the monitoring of risks and setting up comprehensive contingency plans.

"Structural policies need to address the economy's weak supply side, with a view to delivering balanced and sustainable catch-up growth toward EU income levels. The program calls for privatizing, restructuring, or liquidating a wide range of state- and socially owned- enterprises, as well as lowering the cost of doing business, to help expand the undersized private sector.

"The authorities have started to implement their program steadfastly. This gives confidence that the Serbian economy, with the support of the international community, will succeed in overcoming the present difficulties," Mr. Portugal said.


Recent Economic Developments

The global financial turmoil began to spill over to Serbia in the fourth quarter of 2008, as for the region as a whole. The stock market plummeted; sovereign spreads soared; households withdrew some of their deposits; and, amid high volatility and frequent NBS interventions to maintain foreign exchange market liquidity, the dinar depreciated. Growth, which so far was strong, seemed to be losing momentum. At the same time, the reversal of the region-wide food and energy price shocks eased headline inflation pressures. These outcomes were accompanied by the build-up of an increasingly unbalanced external position. The current account deficit could reach 18 percent of GDP in 2008, although it has so far been easily financed by capital inflows, resulting in rising international reserves.

Consequently, external stability risks have increased substantially in the current international environment. These reflect Serbia's unsustainably large external deficit; the private sector's high external indebtedness; high euroization; and indications of weak export competitiveness. Financial stability risks have also increased, but the banking sector's liquidity and capital buffers are comforting.

Program Summary

The authorities' program, supported by the SBA, responds to the abrupt deterioration in the short-term outlook: trading partner growth and prices of key Serbian exports, particularly metals, are projected to slow sharply in 2009; and formerly plentiful capital inflows can no longer be taken for granted, further constraining domestic and cross-border credit growth.

The program's objective is to safeguard macroeconomic and financial stability through strengthened policies, designed to underpin an orderly rebalancing of the economy. The policy package focuses on four main features:

  • Tightening of the fiscal stance in 2009-10, with the 2009 general government deficit limited to 1¾ percent of GDP, followed by further fiscal consolidation in 2010. This involves strict incomes policies for containing public sector wage and pension growth and a streamlining of non-priority recurrent spending, which helps create fiscal space to expand infrastructure investment.

    Strengthening the inflation targeting framework while maintaining a managed floating exchange rate regime.

    Making good use of the accumulated financial sector buffers, while enhancing financial crisis preparedness.

    Implementing structural policies to address the roots of the economy's low capacity to produce, save, and export. The main elements of the fiscal package include

The program's macroeconomic framework assumes a decline of foreign inflows and domestic credit, which should lead to a slowdown in domestic demand, output growth, and inflation, and a narrowing of external imbalances. Real GDP growth is projected to decelerate to 3½ percent in 2009 but should rebound in 2010. With the inflation-reducing effects of commodity price declines and slowing activity being counteracted by pressures on the exchange rate, inflation is projected to slow only gradually to 8 percent by end-2009.

Serbia joined the IMF on December 14, 1992; its quota is SDR 467.7 million (about €541 million or US$707 million) and it has no outstanding use of IMF credit. Its latest arrangement with the IMF was an Extended Fund Facility, completed on February 28, 2006.

Serbia: Selected Economic and Social Indicators, 2006-10 1/

  2006 2007 2008 2009 2010
      Est. Proj. Proj.
  (Change in percent, unless otherwise indicated)

Output, prices, and labor market


Real GDP

5.6 7.1 6.0 3.5 4.5

Real GDP excluding agricultural sector

6.3 8.9 5.9 3.9 5.0

Real domestic demand (absorption)

6.5 11.8 6.3 2.6 2.2

Consumer prices (end of period) 2/

6.6 10.1 9.5 8.0 6.5

Core retail prices (end of period) 2/

5.9 5.4 10.5 ... ...
  (In percent of GDP)

General government finances



43.6 43.0 42.8 42.0 41.2


45.2 44.9 45.2 43.8 42.2

Fiscal balance

-1.6 -1.9 -2.3 -1.8 -1.0

Gross debt

42.5 34.2 33.8 30.9 28.3
  (End of period 12-month change, in percent)

Monetary sector


Money (M1)

37.1 25.3 -8.2 18.2 8.7

Broad money (M2)

38.4 44.5 7.9 5.2 13.5

Domestic credit to non-government

17.1 36.9 29.6 6.1 12.3
  (In percent of GDP, unless otherwise indicated)

Balance of payments


Current account balance

-10.0 -15.9 -17.9 -16.0 -15.4

Exports of goods

21.7 22.0 22.3 20.5 21.7

Imports of goods

42.8 44.9 46.1 42.3 41.6

Trade of goods balance

-21.1 -22.9 -23.8 -21.8 -19.8

External debt (end of period)

63.0 61.1 66.6 71.6 75.8

of which: Private external debt

35.8 40.0 46.0 50.8 56.0

Gross official reserves (in billions of euro)

9.0 9.6 9.0 8.1 8.7

(In months of prospective imports of GNFS)

6.7 6.3 6.2 5.1 5.3

Exchange rate (dinar/euro, period average)

84.2 80.0 81.5 ... ...

Real effective exchange rate (annual average change, in percent; + indicates appreciation)

6.6 7.2 5.0 ... ...

Social indicators


Per capita GDP (2008): US$6,685. Poverty rate (poverty line is US$5 per day, 2007): 6.6 percent.

Unemployment rate (2008): 14 percent.


Sources: Serbian authorities; and IMF staff estimates and projections.
1/ Excluding Kosovo (with the exception of external debt).
2/ Retail prices until 2008. Monitoring of core retail price indices to be discontinued in 2009.


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