IMF Reaches Staff-Level Agreement on Fifth Review of Stand-By Arrangement with Serbia

Press Release No.10/323
September 1, 2010

An International Monetary Fund (IMF) mission, led by Albert Jaeger, visited Serbia during August 19-31, 2010, to conduct discussions on the fifth review of Serbia’s economic program supported by a Stand-By Arrangement (SBA) with the IMF.

At the conclusion of the mission, Mr. Jaeger issued the following statement in Belgrade:

“The IMF mission and the Serbian authorities have reached agreement, subject to approval by the IMF Management and Executive Board, on the completion of the fifth review under the SBA. We expect the request to be considered by the IMF Board in late September.

“Economic indicators suggest that growth momentum has strengthened in the second quarter. However, employment has continued to fall. We still expect real GDP to grow by 1½ percent in 2010 and 3 percent in 2011.

“The program is performing satisfactorily: all quantitative targets for end-June have been met, including the target on the fiscal deficit.

“For the year 2010 it was agreed to broadly maintain the fiscal deficit target of 4¾ percent of GDP and reaffirm the freeze in public wages and pensions. Some spending under execution so far this year offers scope for limited re-allocations of spending later in the year: but the authorities will have to make difficult trade-off decisions, including between increasing one-off payments for pensioners and additional spending on subsidies and net lending. This issue will be revisited during the next review in October. As a matter of priority, the increased allocation for targeted social assistance agreed in May should be implemented expeditiously.

“For 2011, it was agreed to maintain the deficit target at 4 percent of GDP. Regarding public pensions and wages, the first semi-annual CPI inflation indexation step was moved from April 2011 forward to January 2011. The modified indexation plan will allow compensation for possible food price increases during the second half of 2010.

“Progress is being made on the structural benchmarks. In particular, as regards fiscal responsibility legislation, the corresponding amendments to the Budget System Law have been agreed and their submission to Parliament will be a prior action for completing the fifth review. However, progress on structural reforms, particularly in health and education, as well as broader reforms of the business environment, has been significantly slower than expected.

“Monetary policy will remain focused on inflation. Due to a poor summer harvest and higher food prices, risks to inflation are now tilted to the upside. In this regard, the recent shift to a tightening bias in the NBS monetary stance is appropriate. Foreign-owned banks have generally maintained their exposure to Serbia, which proved key to a successful stabilization of the financial sector. While credit support programs also helped mitigate the bust in credit markets, these markets are now functioning more normally, and there is a case for gradually phasing out these programs.”



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