Statement by the IMF Staff Mission to Serbia

Press Release No. 09/292
September 1, 2009

An International Monetary Fund (IMF) mission, led by Albert Jaeger, visited Belgrade from August 24 to September 1 to work on the second review of the IMF-supported Stand-By Arrangement with Serbia (see Press Release No. 09/12).
Mr. Jaeger issued the following statement in Belgrade today:

“There are encouraging signs that the Serbian economy’s decline seems to be moderating. While developments in the first half of the year have been somewhat worse than previously anticipated, financial tensions have eased. We expect output in Serbia to stabilize in the second half of the year, consistent with the output decline of 4 percent for 2009 as a whole. Next year, a modest recovery of 1½ percent is projected, and risks to the growth outlook are now more balanced. Inflation has been within the targeted band and the large current account deficit has been falling rapidly.

“The current stand-by arrangement has generally performed well. Most performance criteria and other agreed measures have been implemented. The external reserve position has strengthened and the banks are honoring their commitments to roll over external exposures. Results of the stress tests for the 12 largest banks indicate that the banking system is adequately capitalized and liquid. However, the performance criterion on the fiscal deficit was exceeded at end-June, reflecting output weakness, but also some implementation problems.

“Regarding the 2009 budget, there was agreement to raise the deficit target from 3 to 4½ percent of GDP, given the need to avoid excessive tightening in a period of output weakness. Attaining this target would however require tight spending execution in the rest of the year. Broad agreement was also reached on initial steps in medium-term structural sectoral reforms in the areas of public administration, large state enterprises and local utilities, pensions, health, and education. The authorities have prepared useful early proposals, but it was recognized that their effects on public spending would be gradual and initially limited, while requiring perseverance in implementation.

“The mission saw a need to address a sizable deficit of 5½ percent of GDP that could be inconsistent with sustainable public finances. This projection already assumes a continued freeze in public wages and pensions, as well as a public hiring freeze. The authorities have considered tax increases as unacceptable, and instead proposed to undertake a more ambitious and comprehensive strategy of multi-year spending reforms. The mission was open to this idea, not least in view of the considerable claims Serbia's large public sector makes on the economy. However, both sides agreed that a determined implementation of the spending-based reforms would be crucial to avoid tax increases, and it was clear that more time was needed to elaborate such a strategy. Thus, it was agreed to aim to complete the second review during the next mission at the end of October, while cooperating on a continued implementation of the program’s measures.

“As regards other areas, the mission recommended to continue focusing monetary policy on inflation. While there may be scope for some monetary easing given the economic slowdown, it was agreed that it should proceed with caution given the still-high inflation. The mission also made several recommendations on improving the design of current credit support programs and the framework for claims enforcement.”



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