Press Release No. 12/451

Press Release No. 12/451
November 20, 2012

A staff team from the International Monetary Fund (IMF), headed by Zuzana Murgasova, visited Belgrade on November 13-20 to discuss recent economic developments, as well as the set of policies that could lead to an IMF-supported program. The discussions with the authorities were constructive and will continue in the months ahead. At the end of the visit Ms. Murgasova made the following statement:

“The Serbian economy faces numerous challenges. The fiscal deficit has widened sharply in 2012 relative to the original budget and to last year’s level, and is unsustainably large. Public debt has also increased significantly. In addition, the external debt burden is high, inflation is volatile, and unemployment is elevated. Economic activity has significantly weakened amid a difficult global environment. GDP is expected to contract by about 2 percent this year, with a modest recovery expected next year. Inflation has risen sharply into double digits.

“Fiscal consolidation is therefore an urgent priority, as recognized by the authorities. If the fiscal deterioration in 2012 proves less than projected—as is currently expected by the authorities—it would be critical that this over-performance be saved. Looking ahead, addressing the economic challenges requires appropriately balancing fiscal consolidation and growth objectives. The consolidation path should be supported by credible measures to ensure that medium-term fiscal and debt sustainability is firmly in grasp. Accordingly, the mission believes that the identified measures may not translate into the full needed adjustment in 2013, while at the same time views the announced 2013 budget deficit target as overly ambitious. Moreover, while the mission welcomes a number of the authorities’ fiscal measures that initiate fiscal consolidation, there remains scope for improving the quality of the 2013 budget. Over the medium term, policies need to aim for a sustained, multi-year fiscal consolidation to reduce public debt below the legal ceiling of 45 percent of GDP, with a focus on expenditure rationalization.

“The IMF team welcomes the continued commitment to the inflation targeting framework. The monetary policy tightening in recent months was appropriate to stem rising inflation expectations. This, alongside fiscal adjustment, should help lower inflation during 2013.

“Making progress on the extensive structural reform agenda is essential to unlock Serbia’s growth potential. In this regard, the mission discussed a number of reforms as outlined in the authorities’ draft Fiscal Strategy and suggested areas for enhancement, while placing emphasis on their timely implementation.”