## 1srbea2021002 ## Source details **Canonical URL:** [1srbea2021002](https://www.imf.org/-/media/files/publications/cr/2021/english/1srbea2021002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1srbea2021002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1srbea2021002.pdf.json) --- ### Executive summary — recent developments - Real GDP: "1 percent contraction of real GDP in 2020." - 1Q2021 GDP estimate: "1.7 percent year-on-year growth." - 2021 growth forecast revised from "5 percent to 6 percent." - Inflation and monetary indicators: - Headline inflation: "1.8 percent in March; 2.8 percent in April." - Core inflation: "1.8 percent." - Key policy rate: "unchanged at 1 percent since December (after four cuts in 2020)." - Fiscal outcomes and measures: - Fiscal deficit in 2020: "8.1 percent of GDP." - Original 2020 support package: "about 9 percent of GDP." - Public debt at end-2020: "58.4 percent of GDP." - Supplementary budget (April 2021) raised projected 2021 deficit from "3 percent of GDP to 7 percent." - External sector: - Current account deficit in 2020: "4.3 percent of GDP (2.6 pp of GDP below the 2019 deficit)." - Net FDI inflows in 2020: "18 percent below the 2019 level but still exceeded the current account deficit." - Central Bank international reserve position: "described as adequate by usual metrics." - Health and containment: - As of May 12: "703,497 confirmed COVID-19 cases and 6,611 deaths in Serbia." - Vaccine rollout: "one of the fastest COVID-19 vaccine rollouts in Europe." - Policy process: - Discussions: "held remotely during April 12-23, 2021." - Document date: "June 3, 2021." ### Outlook and risks - Growth projections: - "Real GDP growth projected at 6 percent in 2021, gradually decreasing to potential of around 4 percent over the medium term." - "Permanent effect of the crisis on the level of real GDP: 2 percent compared with pre-pandemic projections by end-2023." - Inflation and external projections: - Inflation: "projected to remain in the lower half of the inflation target band, before reaching the midpoint over the medium term." - Current account deficit: "projected at 5.1 percent of GDP in 2021." - Medium-term current account deficit: "projected to remain at about 5 percent of GDP and be fully covered by FDI." - Risks (direction and nature): - Downside risks: "new waves of infections in Serbia or trading partners; slower vaccine rollout; delayed labor market effects; tighter global financing conditions raising borrowing costs." - Upside risks: "stronger-than-expected impact of fast vaccine rollout domestically and globally; stronger domestic demand from fiscal package momentum." - Contingent policy options if new waves occur: - "Ensure continued provision of adequate health care." - "Targeted measures for the most in need and for companies/sectors most critical to the economy." - "Identify options for reallocations of spending within the 2021 budget." - "Continued monetary accommodation, including operations to maintain market liquidity." - "Intensified monitoring of emerging financial vulnerabilities, in particular of banks and troubled state-owned enterprises (SOEs)." ### Fiscal policy — findings and recommendations - Recent stance and impact: - "Fiscal policy has been expansionary to support the recovery; 2020 package included about 9 percent of GDP in support measures." - "Revenue collection in 2020 was flat compared to 2019 despite deferrals of labor taxes and social security contributions." - Key statistics: - 2020 fiscal deficit: "8.1 percent of GDP." - Public debt: "58.4 percent of GDP by year-end 2020." - Supplementary 2021 budget: projected deficit from "3 percent to 7 percent of GDP." - State guarantees on bank loans under the government guarantee scheme: potential maximum fiscal cost "EUR 435 million (0.85 percent of GDP) as of end-April 2021." - Supplementary Budget 2021 — itemized measures (percent of GDP): - Temporary pandemic support and healthcare measures: "3.3" - Wage subsidies (three months): "1.2" - Sector support (incl. travel and hospitality sectors): "0.1" - Universal cash transfers (to be disbursed in May and November): "0.5" - Assistance to pensioners (one-off payment and a cash transfer to be paid in September): "0.4" - One-off assistance to the unemployed: "0.1" - Other Subsidies: "0.6" - Healthcare expenditures: "0.5" (one-off higher wages for the healthcare sector: "0.2"; healthcare expenditures (incl. COVID-19 vaccines): "0.3") - Capital expenditures: "1.7" - Healthcare infrastructure (incl. factory for vaccine production and a new COVID-19 hospital): "0.1" - Transportation infrastructure: "0.3" - Environmental protection infrastructure: "0.3" - Defense and security related expenditure: "0.7" - Other: "0.3" - Financing, market access, and downside risks: - Gross financing needs for 2021: "12.4 percent of GDP, compared to 15 percent of GDP in 2020." - Eurobond issuances in 2020: "EUR 3 billion" (two Eurobonds); February issuance: "12-year Eurobond for EUR 1 billion at a 1.9 percent yield." - JP Morgan inclusion: "three dinar-denominated government bonds into its EM indexes." - Downside risks to debt outlook: "materialization of unforeseen liabilities, additional fiscal costs, a slowdown in growth, and pressures on the exchange rate." - Policy guidance: - Support and extension of loan guarantee scheme: "will help underpin recovery, prevent bankruptcies, and protect employment." - Further support: "should be targeted more directly at the most vulnerable households and firms and sectors most affected by the pandemic." - Once recovery is under way: "rebuild policy buffers and anchor them by a new fiscal rule." - "Advance structural fiscal reforms to restore buffers and anchor medium-term fiscal performance." - Staff recommendation: "save possible additional revenues from better-than-expected 2021 performance." ### Monetary and financial sector policies - Current stance: - "Monetary policy should remain accommodative; financial sector policies should be supportive." - NBS key policy rate: "kept at 1 percent since December" after cuts in 2020. - Extraordinary NBS measures (selected): - FX sales to offset depreciation pressures: "EUR 1.45 billion in 2020 and EUR 50 million in 1Q2021." - Reserves around: "EUR 13.5 billion (or 5.4 months of prospective imports)." - Outright purchase of dinar government securities at market rates: "1.6 percent of GDP." - Repo line with the ECB (up to "EUR 1 billion") until March 2022. - Three rounds of debt moratoria; at end-February 2021 around "43,000 had used the third facility with an amount of EUR 0.9 billion (around 4 percent of private sector credit outstanding)." - Subsidy for dinar loans: increased remuneration by "0.50 percentage points" on allocated required reserves in dinars. - Financial system condition: - Banking system: "remains stable, liquid, and well capitalized." - Credit growth: "7.7 percent yoy in March 2021." - Credit dinarization: "37.4 percent in February 2021" (also reported "38.3 percent and 37.9 percent" elsewhere in March 2021 series). - NPLs: "3.9 percent at end-March 2021"; allowances covered "58 percent of gross NPLs at end-February 2021." - Loan loss provisions increased by "12 percent in 2020 and by an additional 1.9 percent in the first two months of 2021." - Structural financial recommendations: - "Develop domestic capital markets." - "Further encourage dinarization to enhance financial stability and support medium-term growth." - Policy discussions: - Maintain accommodative monetary policy while "monitoring banking sector risks" and expect "some increase in NPLs once support measures expire." - "Dividend distribution suspended until pandemic ends." - New measures discouraging foreign-currency lending postponed to later in 2021. - Staff urged prompt resolution of litigation related to charging of loan and mortgage insurance fees ("more than 130,000 cases at end-December"). ### Structural reforms and governance priorities - SOE reforms and governance: - "Advancing reforms of large and inefficient state-owned enterprises (SOEs) remains critical." - New ownership and governance strategy adopted "April 1, 2021." - Time-bound actions: - Action plan to implement SOE strategy: target "end-June 2021." - Centralized SOE registry and mechanisms: target "end-December 2021." - New ownership management law: target "December 2022." - Specific SOE cases: - Petrohemija: "progress toward privatizing" and intention to launch tender during the Summer (2021). - Elektroprivreda Srbije (EPS): convert to joint-stock company by "end-November 2022 (RT)"; electricity tariff increased by "3.4 percent in February" but remains lower than EU average. - Srbijagas: "operational unbundling" intended; convert to joint-stock company encouraged. - Public investment and procurement: - PIMU established in 2019; PIMIS expected operational in 2022. - Public procurement: new system introduced July 2020; "By 2022 all transactions should use the new online portal." - Staff welcomed scaling up of public investment in green infrastructure (railways, sewage and waste treatment). - Tax administration and fiscal risks: - STA Transformation Program Action Plan (TPAP) for 2021-25; priority on "business process re-engineering, e-fiscalization, and procurement of a new IT system." - Fiscal Risks Department (FRD) expanding coverage; methodologies and by-laws to be completed by "end-September 2021 RT." - Social protection and labor: - Means-tested social assistance programs: "well-targeted but benefits and coverage are limited; only half of the population under the poverty line receives some support." - Authorities plan to upgrade social cards to expand coverage for the most vulnerable. - Labor tax wedge: "remains relatively high"; authorities indicated willingness to reduce taxes on labor income by "gradually increasing non-taxable personal income threshold." - Unemployment rate fell to "9.5 percent (from 10.9 percent in 2019)." - Employment increased to "61.3 percent (from 60.7 percent in 2019)." - Informal employment: "17 percent (from 18.2 percent in 2019)." ### Transition to greener economy and environmental priorities - Climate and energy context: - Costs from extreme climate/events since 2000: "exceeded EUR 5 billion" (authorities' estimate). - Energy sector: "about 70 percent of total electricity" generated from coal. - Policy actions: - Law on Climate Change adopted in March; "a low carbon development strategy and an action plan should be adopted within two years." - March 2021: four bills in the energy sector adopted to enhance energy efficiency and renewables. - January 2021 rulebook on liquid fossil fuels expected to reduce SO2 emissions and improve air quality. - Financing and instruments: - Prioritize green investments (including Serbia 2025 program) and carbon pricing mechanisms. - Consider introduction of innovative instruments (e.g., green bonds) with IFI support. ### External sector assessment and debt sustainability (DSA) - External position: - NIIP: "-92.6 percent of GDP in 2020 (from -88 percent in 2019)." - Net FDI inflows: "7.8 percent of GDP in 2019; declined to 6.2 percent of GDP in 2020." - Foreign exchange reserves end-2020: "EUR 13.5 billion, or 5.4 months of prospective imports." - Reserves adequacy: "gross reserves at end-2020 corresponded to 126 percent of the ARA metric." - Current account and REER: - Adjusted current account deficit: "5.5 percent of GDP." - Current account norm: "-5.9 percent of GDP." - Model-estimated current account gap: "0.4 percent of GDP." - Nominal effective exchange rate appreciated "by 2½ percent during 2020"; REER appreciated "by 2.7 percent during 2020." - REER gap assessed in the range "[-0.9, 18.1]." - Public debt and financing: - Public debt increased by "5.6 percentage points in 2020 to 58.4 percent of GDP." - Baseline DSA macro assumptions: "Real GDP rebound in 2021: 6 percent"; "Fiscal deficit projected for 2021: 6.9 percent of GDP (from 8.1 percent in 2020)." - Gross financing needs in 2021 estimated at "12.2 percent of GDP" (elsewhere reported "12.4 percent of GDP"). - Share of debt denominated in foreign currency: "69 percent (49 percent is in euro)." - Stress tests: combined macroeconomic shock could raise public debt to "70 percent of GDP"; contingent liabilities shock increases financing needs by about "4 percent of GDP in 2022." - Baseline numerical highlights (selected figures as presented): - Real GDP growth (table): 2018: "4.5"; 2019: "4.2"; 2020: "-1.5"; 2021 (Est.): "-1.0"; 2022 (Proj.): "5.0"; 2023 (Proj.): "6.0". - Consumer prices (average): 2018: "2.0"; 2019: "1.9"; 2020: "1.7"; 2021 (Est.): "1.6"; 2022 (Proj.): "1.9"; 2023 (Proj.): "2.5". - Fiscal balance (percent of GDP): 2018: "0.6"; 2019: "-0.2"; 2020: "-8.9"; 2021 (Est.): "-8.1"; 2022 (Proj.): "-3.0". - Gross debt (percent of GDP): 2018: "54.4"; 2019: "52.8"; 2020: "59.1"; 2021 (Est.): "58.4"; 2022 (Proj.): "57.7". - Current account balance (percent of GDP): 2018: "-4.8"; 2019: "-6.9"; 2020: "-5.7"; 2021 (Est.): "-4.3"; 2022 (Proj.): "-5.8". - Gross official reserves (billions of euro): 2018: "11.3"; 2019: "13.4"; 2020: "13.4"; 2021 (Est.): "13.5". - External debt (percent of GDP): 2018: "66.1"; 2019: "65.5"; 2020: "67.4"; 2021 (Est.): "70.9". - Total financing requirement (2018–2026; billions of euros): - Total financing requirement sequence: "8.4 10.8 5.5 8.4 8.0 7.8 8.4 7.2 7.2." - Current account deficit sequence: "2.1 3.2 2.0 2.5 2.7 2.8 3.1 3.3 3.5." - Debt amortization sequence: "5.0 5.8 3.3 4.1 4.3 4.2 4.5 3.3 3.2." - Total financing sources (2018–2026; billions of euros): - Foreign direct investment (net) sequence: "3.2 3.6 2.9 3.1 3.3 3.5 3.7 3.9 4.2." - Debt financing sequence: "5.0 7.1 6.0 6.7 5.3 4.9 4.6 4.1 4.0." ### Program modalities, conditionality, and monitoring - Program instrument: "requested new 30-month Policy Coordination Instrument (PCI)." - Fund financing: "Serbia does not need the Fund’s financial assistance under the baseline and is not seeking financial assistance from the Fund." - Reviews and schedule: - Board Discussion of the PCI Request: "June 21, 2021." - First Review: "October 1, 2021." - Second Review: "April 1, 2022." - Third Review: "October 1, 2022." - Fourth Review: "April 1, 2023." - Fifth Review: "October 1, 2023." - Monitoring framework: - Quantitative Targets (QT) examples (in billions of dinars): - Ceiling on general government fiscal deficit: end-Jun. 2021: "175.5"; end-Sep. 2021: "263.3"; end-Dec. 2021: "412.2". - Ceiling on current primary expenditure (Republican Budget): end-Jun. 2021: "621.5"; end-Sep. 2021: "916.0"; end-Dec. 2021: "1256.0". - Ceiling on accumulation of domestic payment arrears: "1.0" at listed dates. - Continuous Targets: - Ceiling on accumulation of external debt payment arrears (EUR): "0.0" at listed dates. - Inflation consultation band (end-of-period center point and bands): - End-Jun. 2021 center point: "3.0"; upper band limit: "4.5"; lower band limit: "1.5". - End-Jun. 2022 center point: "2.5"; upper band limit: "4.0"; lower band limit: "1.0". - Reform Targets (selected RTs and target dates): - Publish monthly GFSM 2014 fiscal accounts and quarterly debt data: "End-September 2021." - Publish inventory of state aid schemes and adopt necessary secondary legislation: "End-September 2021." - Adopt methodology to monitor fiscal risks and adopt by-laws: "End-September 2021." - Adopt new deficit-based fiscal rule anchored on public debt (in consultation with Fund staff): "End-June 2022." - Adopt time-bound action plan to implement SOE ownership and governance strategy: "End-June 2021." - Adopt strategy for capital market development and action plan: "End-September 2021." - Change legal status of EPS to joint stock company: "End-November 2022." ### Risk assessment and policy responses - Key risks and policy responses (selected): - Unexpected shifts in the COVID-19 pandemic - Relative Likelihood: "Medium"; Time Horizon: "Short term"; Impact if Realized: "High." - Policy Response: "Extend fiscal support measures"; "Maintain accommodative monetary policy"; "Gradually unwind policy support while ensuring recovery is well entrenched." - Sharp rise in global risk premia - Relative Likelihood: "Medium"; Time Horizon: "Short- to medium term"; Impact: "High." - Policy Response: "Maintain a relatively large liquidity buffer"; "Fiscal discipline and decisive progress on structural reforms." - Domestic policy errors or loss of fiscal discipline - Relative Likelihood: "Medium"; Time Horizon: "Short- to medium term"; Impact: "High." - Policy Response: "Maintain strong fiscal and structural reform policies and strengthen institutions." ### Staff appraisal — summary judgments - Positive assessment: - "Fiscal, monetary and financial sector measures provided vital support during the pandemic." - "Recovery appears to be strengthening; inflation is low and banking system stable and liquid." - "Despite a large fiscal impulse, borrowing costs remain contained and public debt is sustainable around 60 percent of GDP." - Remaining cautions: - "Pandemic risks persist: uncertainties on pace and effectiveness of vaccinations regionally, and timing/scale of reopening." - "Full impact on labor market and NPLs likely to manifest later in the year as wage subsidies, dismissal caps, and loan moratoriums expire." - "Further policy initiatives may be needed to cushion renewed crisis effects while maintaining transparency and accountability and considering limited fiscal space." - "Serbia’s external position remains broadly consistent with fundamentals and desirable policy settings." *Source: EXECUTIVE SUMMARY and selected annexes (1srbea2021002) — Serbia, IMF staff report, June 3, 2021.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Recent economic developments - Serbia recorded a 1 percent contraction of real GDP in 2020, supported by a large policy package. - Job losses have mostly been contained to the informal sector due to policy measures aimed at preserving formal employment. - 1Q2021 GDP estimate: 1.7 percent year-on-year growth, exceeding staff and authorities' expectations. - Growth forecast for 2021 revised from 5 percent to 6 percent. - Inflation and monetary indicators: - Headline inflation: 1.8 percent in March; 2.8 percent in April. - Core inflation: 1.8 percent. - Key policy rate: unchanged at 1 percent since December (after four cuts in 2020). - Fiscal outcomes and measures: - Fiscal deficit in 2020: 8.1 percent of GDP (from near balance in 2019). - Original 2020 support package: about 9 percent of GDP. - Public debt at end-2020: 58.4 percent of GDP. - A supplementary budget adopted in April 2021 raised the projected 2021 deficit from 3 percent of GDP to 7 percent. - External sector: - Current account deficit in 2020: 4.3 percent of GDP (2.6 pp of GDP below the 2019 deficit). - Net FDI inflows in 2020: 18 percent below the 2019 level but still exceeded the current account deficit. - Central Bank international reserve position: described as adequate by usual metrics. - Health and containment: - Fourth wave of infections started in February and tapered thereafter. - As of May 12, there were 703,497 confirmed COVID-19 cases and 6,611 deaths in Serbia. - Serbia embarked on one of the fastest COVID-19 vaccine rollouts in Europe. - Policy process: - Discussions were held remotely during April 12-23, 2021. - Document date: June 3, 2021. ### Outlook and risks - Growth and medium-term projections: - Real GDP growth projected at 6 percent in 2021, gradually decreasing to potential of around 4 percent over the medium term. - Permanent effect of the crisis on the level of real GDP: 2 percent compared with pre-pandemic projections by end-2023. - Over the medium term, growth supported by strong FDI, continued high public investment, and an assumed recovery in trading partner countries. - Inflation and external projections: - Inflation projected to remain in the lower half of the inflation target band, before reaching the midpoint over the medium term. - Current account deficit projected at 5.1 percent of GDP in 2021. - Medium-term current account deficit projected to remain at about 5 percent of GDP and be fully covered by FDI. - Risks (direction and nature): - Downside risks: new waves of infections in Serbia or trading partners; slower vaccine rollout; delayed labor market effects; tighter global financing conditions raising borrowing costs. - Upside risks: stronger-than-expected impact of fast vaccine rollout domestically and globally; stronger domestic demand from fiscal package momentum. - Contingent policy options if new waves occur: - Ensure continued provision of adequate health care. - Targeted measures for the most in need and for companies/sectors most critical to the economy. - Identify options for reallocations of spending within the 2021 budget. - Continued monetary accommodation, including operations to maintain market liquidity. - Intensified monitoring of emerging financial vulnerabilities, in particular of banks and troubled state-owned enterprises (SOEs). ### Fiscal policy (findings and recommendations) - Recent stance and impact: - Fiscal policy has been expansionary to support the recovery; 2020 package included about 9 percent of GDP in support measures. - Revenue collection in 2020 was flat compared to 2019 despite deferrals of labor taxes and social security contributions. - Key statistics: - 2020 fiscal deficit: 8.1 percent of GDP. - Public debt: 58.4 percent of GDP by year-end 2020. - Supplementary 2021 budget raised projected deficit from 3 percent to 7 percent of GDP. - State guarantees on bank loans under the government guarantee scheme: potential maximum fiscal cost estimated at EUR 435 million (0.85 percent of GDP) as of end-April 2021. - Policy guidance: - Latest fiscal support and extension of the loan guarantee scheme will help underpin recovery, prevent bankruptcies, and protect employment. - Any further support should be targeted more directly at the most vulnerable households and firms and sectors most affected by the pandemic. - Once recovery is fully under way, rebuild policy buffers and anchor them by a new fiscal rule. - Advance structural fiscal reforms to restore buffers and anchor medium-term fiscal performance. ### Monetary and financial sector policies - Current stance: - Monetary policy should remain accommodative; financial sector policies should be supportive. - After four cuts in 2020 the NBS key policy rate has been kept at 1 percent since December. - Financial system condition: - Banking system remains stable, liquid, and well capitalized. - Any buildup of risks should be closely monitored. - Structural financial recommendations: - Develop domestic capital markets. - Further encourage dinarization to enhance financial stability and support medium-term growth. ### Structural reforms - Priorities and progress: - Advancing reforms of large and inefficient state-owned enterprises (SOEs) remains critical. - Improving the business environment would help attract foreign and domestic investment. - Promoting green growth and enhancing the social safety net would support recovery and more sustainable development. - The 2018 PCI supported fiscal discipline and structural reforms with progress on modernizing tax administration, strengthening public investment management frameworks, and privatization (including of the largest state-owned bank), though delays occurred in some areas. - Programmatic focus: - The requested new 30-month Policy Coordination Instrument (PCI) aims to support the ongoing recovery while maintaining macroeconomic and financial stability by: - Anchoring the medium-term fiscal policy framework to a fiscal rule. - Enhancing monitoring of fiscal risks. - Increasing transparency and accountability of state aid. - Advancing SOEs reforms. ### Program discussions and policy advice - Staff recommendations: - Sustain recovery through continued monetary accommodation and temporary, well-targeted fiscal support while managing fiscal and financing risks and reducing fiscal deficits over the medium term. - Advance structural fiscal reforms to underpin restoration of fiscal buffers and anchor fiscal performance. - Advance broader structural reforms to foster stronger, more sustainable, inclusive, and greener growth. - Authorities’ view: - Authorities requested a successor 30-month PCI to demonstrate commitment to reforms, enhance macroeconomic stability, and maintain close policy dialogue with the Fund. - Authorities broadly agreed with the staff’s assessment and the 2021 growth projection of 6 percent, assessing risks as broadly symmetrical. *Source: EXECUTIVE SUMMARY (1srbea2021002) — Serbia, IMF staff report, June 3, 2021.* ### 12. Serbia entered into the COVID-19 crisis from a strong fiscal position. Under two ### Serbia entered into the COVID-19 crisis from a strong fiscal position. Under two ### Fiscal position entering the crisis - Serbia completed two consecutive IMF programs during 2015-20 that revamped a stagnating economy with collapsing tax receipts and overspending. - Despite large public wage increases since 2017 and a large pension bill, total current expenditures in percent of GDP remained stable through 2019. - Rising public investment turned the fiscal balance from small surpluses to a small deficit in 2019—well within the program limit. - Revenue collection gradually improved due to improved tax administration and rising incomes. - Public debt declined sharply during 2015-20. - Growing investors’ appetite for Serbia’s government bonds and benign international market conditions reduced borrowing costs and created sizable liquidity buffers. ### Supplementary Budget 2021 — content and amplification of support - Original 2021 budget envisaged a deficit of 3 percent of GDP and included higher public investments while phasing out temporary 2020 crisis measures. - The 2021 supplementary budget raises the deficit to 7 percent of GDP and includes: - Renewed temporary support measures for households and firms estimated at 2.3 percent of GDP. - Healthcare expenditures of 0.5 percent of GDP. - Subsidies, including support to SOEs (railways and road maintenance) of 0.5 percent of GDP. - Capital investments revised upward by 1.7 percent of GDP (infrastructure, environmental protection, a COVID-19 hospital, transport infrastructure, and purchase of military equipment). - Higher spending offset in part (about 1 percent of GDP) by higher revenues. - Expansion of existing state-guaranteed bank loans to SMEs by 1 percent of GDP. - New lending guarantee scheme for vulnerable companies of 1 percent of GDP. ### Supplementary Budget 2021 — itemized measures and percent of GDP - Temporary pandemic support and healthcare measures: 3.3 - Wage subsidies (three months): 1.2 - Sector support (incl. travel and hospitality sectors): 0.1 - Universal cash transfers (to be disbursed in May and November): 0.5 - Assistance to pensioners (one-off payment and a cash transfer to be paid in September): 0.4 - One-off assistance to the unemployed: 0.1 - Other Subsidies: 0.6 - Healthcare expenditures: 0.5 - One-off higher wages for the healthcare sector: 0.2 - Healthcare expenditures (incl. COVID-19 vaccines): 0.3 - Capital expenditures: 1.7 - Healthcare infrastructure (incl. factory for vaccine production and a new COVID-19 hospital): 0.1 - Transportation infrastructure: 0.3 - Environmental protection infrastructure: 0.3 - Defense and security related expenditure: 0.7 - Other: 0.3 ### Financing, market access, and downside risks - Gross financing needs for 2021 are estimated at 12.4 percent of GDP, compared to 15 percent of GDP in 2020. - At crisis onset non-residents scaled down investments in government securities by 0.5 percent of GDP, prompting a larger drawdown of government deposits and liquidity provision by the NBS. - Serbia placed two Eurobonds totaling EUR 3 billion in 2020. - February issuance: a 12-year Eurobond for EUR 1 billion at a 1.9 percent yield. - JP Morgan announced inclusion of three dinar-denominated government bonds into its EM indexes (expected to increase liquidity and broaden investor base). - Discussions with Euroclear for settlement of Serbian securities are advancing. - Downside risks to the debt outlook: materialization of unforeseen liabilities, additional fiscal costs, a slowdown in growth, and pressures on the exchange rate. ### Policy discussions and fiscal strategy - Supplementary budget provides additional relief to households and businesses affected by new pandemic waves; measures considered sufficiently targeted by the authorities. - Staff view: additional temporary loosening warranted given worsening pandemic and economic outlook; agreed it does not jeopardize fiscal sustainability. - Staff noted some measures could be better targeted (e.g., wage subsidies to COVID-impacted businesses only; cash transfers targeted to households in need). - Staff welcomed scaling up of public investment in green infrastructure (railways, sewage and waste treatment). - Authorities stated increased defense spending was one-off. - Authorities to monitor fiscal risks from the credit guarantee scheme and ensure transparency and accountability in COVID-related spending, including official accounting in budget execution reports and ex-post audit by the State Audit Institution (expected by end-2021). - Flexibility in crisis response should continue in 2021 and 2022; avoid premature withdrawal of support. - With expected rebound in private investment and consumption, a decline in the 2022 deficit to 3 percent of GDP—underpinned by expiration of one-off support measures—would allow high public investment while setting public debt on a downward trajectory. - A gradual further decline of the fiscal deficit in subsequent years would support convergence of output toward potential by 2023. - Staff recommendation: save possible additional revenues from better-than-expected 2021 performance. ### Fiscal rule and medium-term fiscal framework - Once recovery is fully under way, public finances should be anchored by adoption of a new fiscal rule. - Staff view: a small fiscal deficit from 2023 onwards, anchored to the level of public debt, is appropriate to put public debt on a downward path and secure investor confidence. - Authorities agreed to design a new fiscal rule framework in consultation with Fund staff, including debt thresholds, escape clauses, correction mechanisms, and a strong accountability framework; formalization by mid-2022 (end-June 2022 RT). - Staff advised prioritizing capital investments and gradual reduction of the public sector wage bill as a percent of GDP after sizable increases in recent years (authorities agreed). - Pensions should continue to be indexed in line with the Swiss formula; authorities noted no plans to revise the pension indexation formula. ### Structural reforms, governance, and risk management priorities - Tax administration - STA has progressed in auditing, compliance risk management, large taxpayer unit, and new legislation on unexplained wealth. - A Transformation Program Action Plan (TPAP) for 2021-25 will guide modernization. - Reforms focus on business process re-engineering, e-fiscalization, and procurement of a new IT system. - Recruitment of additional STA staff remains a priority and a new HR strategy is being developed. - Fiscal risks - Fiscal Risks Department (FRD) expanding coverage with IMF and World Bank TA. - Methodologies to monitor and manage fiscal risks from litigation and local governments to be completed by end-September 2021 RT. - Bylaws detailing responsibilities and use of fiscal risks reports to be finalized by end-September 2021 RT. - Authorities rebuilding capacity after personnel departures. - Public investment management - Public Investment Management Unit (PIMU) established in 2019. - Development of a Public Investment Management Information System (PIMIS) ongoing; expected operational in 2022. - All public investment projects should continue to be included in a single project pipeline. - State aid - Independent and well-resourced State Aid Commission appointed by Parliament. - Secondary legislation to make the Law on State Aid Controls effective and aligned with the EU acquis; publish inventory of state aid schemes and amounts (end-September 2021 RT). - Public procurement - New public procurement system introduced in July 2020. - By 2022 all transactions should use the new online portal; selected G2G projects and infrastructure projects of ‘special importance for the Republic of Serbia’ can be exempted. - Mission emphasized competitive bidding, full use of the portal, maintenance of audit trails, and publication of awarded entities, beneficial owners, and contract details to mitigate corruption risks. - Social protection - Means-tested social assistance programs are well-targeted but benefits and coverage are limited; only half of the population under the poverty line receives some support. - Government effort to upgrade social cards should be used to expand coverage of the most vulnerable. - Public wage and employment framework - Authorities committed to adopt a new public wage system and amendments to the job catalogue during 2021 for implementation in 2022. - Pace of wage convergence should depend on available fiscal space. - General government employment controlled by a cap on new hires; Employment Commission decisions guide individual hires with enhanced flexibility since January 2021. - Authorities plan to phase out existing system once medium-term workforce planning is effective. - Labor taxation - Labor tax wedge remains relatively high, especially for low-income and part-time contract workers. - Authorities indicated willingness to reduce taxes on labor income by gradually increasing non-taxable personal income threshold. - Mission suggested options including introduction of a family allowance or tax breaks for social security contributions for low wage earners. - Fiscal statistics - Submission of general government fiscal data to the IMF GFS Yearbook restarted in January 2021. - With Fund TA, monthly fiscal accounts reporting in line with GFSM 2014 presentation and international dissemination best practices is being finalized (end-September 2021 RT). ### Monetary and financial sector policies — background and measures - NBS policy rate cut from 2.25 percent in 2020 to 1 percent by December; interest rate corridor reduced to ±0.9pp and has remained since. - To offset depreciation pressures, NBS foreign exchange sales: EUR 1.45 billion in 2020 and EUR 50 million in 1Q2021. - Reserves around EUR 13.5 billion (or 5.4 months of prospective imports), supported by Eurobond issuances. - Extraordinary NBS measures during the pandemic: - Additional liquidity through: dinar repo purchases and FX swap auctions; outright purchase of dinar government securities at market rates (1.6 percent of GDP); making qualifying local-currency corporate bonds issued before end-2020 eligible for open market operations and as collateral. - Repo line with the ECB (up to EUR 1 billion) until March 2022. - Subsidizing loans in dinars by increasing remuneration by 0.50 percentage points on allocated required reserves in dinars for banks approving dinar loans under the state guarantee scheme. - Three rounds of debt moratoria: April–June 2020, August–September 2020 (both directed at all borrowers unless they opted out), and December 2020–April 2021 (targeted retail and corporate customers affected by the pandemic). At end-February 2021 around 43,000 had used the third facility with an amount of EUR 0.9 billion (around 4 percent of private sector credit outstanding). - Facilitating housing loans by reducing mandatory down payment for first-time home buyers. ### Banking sector performance and risks - Credit growth reached 7.7 percent yoy in March 2021 supported by NBS measures and government guarantee scheme for SMEs. - Credit dinarization reached an all-time high of 37.4 percent in February 2021. - NPLs at 3.9 percent at end-March 2021. - Total loan loss provisions increased by 12 percent in 2020 and by an additional 1.9 percent in the first two months of 2021; allowances for loans’ impairment covered 58 percent of gross NPLs at end-February 2021. - Banks remained profitable; profitability declined less than elsewhere in the region. - Policy discussions: - With inflation below target and expectations anchored, staff supported maintaining accommodative monetary policy and measures to secure recovery; monetary normalization not anticipated until after 2021. - Authorities retain policy space to respond to pressures and may extend measures if needed. - Staff stressed need to closely monitor banking sector risks; some increase in NPLs expected once support measures expire. - Authorities agreed banks should assess creditworthiness and reclassify exposures when repayment unlikely; dividend distribution suspended until pandemic ends. - New measures discouraging foreign-currency lending postponed, planned to become effective later in 2021. - Staff urged prompt resolution of litigation related to charging of loan and mortgage insurance fees (more than 130,000 cases at end-December). *Source: Serbian authorities and IMF staff calculations as presented in the supplied content.* ### 24. The authorities and staff discussed the case for more exchange rate flexibility over the ### 24. The authorities and staff discussed the case for more exchange rate flexibility over the ### Exchange rate flexibility: views and risks - Authorities view exchange rate stability as essential to macroeconomic stability given adverse impacts of a significant depreciation on confidence, inflation, FX denominated debt and the dinarization strategy. - Staff view: - Maintain exchange rate stability through the crisis to maintain confidence. - Over the medium term, a more flexible exchange rate could support dinarization by exposing borrowers to the risks they incur through unhedged FX loans. - Development of hedging instruments would minimize these risks. - Authorities' responses: - Investors value exchange rate stability. - Hedging markets had not developed in earlier periods of exchange rate volatility. - Dominance of foreign-currency pricing in trade invoices limits the ability of a flexible exchange rate to act as a shock absorber. ### Capital markets and development finance (paragraph 25) - Findings: - Capital markets in Serbia remain relatively underdeveloped. - Developing capital markets could provide more financing options for firms, allow borrowing based on future cash flow rather than collateral, and enable longer maturity financing than most bank financing permits. - Development of capital markets could facilitate the dinar becoming a long-term store of value, supporting dinarization. - Authorities' actions and plans: - Prepared a strategic outline to enhance capital markets (with EBRD support). - An action plan should be ready by end-September 2021 (RT). - Preparing a plan for development finance to facilitate access to finance, in particular for SMEs. - Continuing to implement the new strategy for state-owned bank BPS (prepared with World Bank assistance) to reorient commercially toward retail banking, entrepreneurs, micro-enterprises and small enterprises, and improve corporate governance (PS ¶30). - Staff recommendation: - Reiterated case against creating a development bank because of governance concerns and fiscal risks; authorities indicated such a bank would not be included in their planning (PS ¶31). ### Labor market and informal sector (paragraph 26) - Key statistics (exactly as in source): - Unemployment rate fell to 9.5 percent (from 10.9 percent in 2019). - Employment increased to 61.3 percent (from 60.7 percent in 2019). - Informal employment dropped to 17 percent (from 18.2 percent in 2019), albeit with some recovery in 4Q2020 yoy. - Observations: - Labor market impact from the pandemic appears contained within a declining unemployment trend and a still-large informal sector. - Registered employment and unemployment showed some pick-up in early 2021, possibly reflecting a return to active job search of those who left the labor force due to the pandemic. - Policy measures to prevent layoffs did not cover informally-employed and temporary/seasonal workers; layoffs may increase once job protections expire. - Authorities noted a significant return of Serbian citizens working abroad due to the pandemic. ### SOE ownership, governance and privatization (paragraphs 27–29) - Background: - Serbia has a relatively large SOE sector, which has been a drag on growth and brought large fiscal costs in the past. - New ownership and governance strategy for SOEs adopted in March, prepared with EBRD support. - The state ownership policy complements efforts to monitor and tackle fiscal risks and enhance efficiency (PS ¶40). - Policy commitments and timelines: - Action plan to be adopted by end-June 2021 (RT). - Key actions to include developing a KPI framework, establishing a unified monitoring process for the state-owned policy, and establishing composition, fit and proper criteria, and tenure guidelines for supervisory boards. - Develop a centralized and updated database with a registry of all SOEs and their assets and adopt a ministerial act by the Ministry of Economy presenting mechanisms and criteria for approving key SOE decisions (end-December 2021 RT). - Preparation of a new ownership management law (December 2022 RT). - Plans to restructure large public utility companies and resolve remaining strategic companies in the privatization portfolio. - Specific SOE cases: - Petrohemija: Authorities noted progress toward privatizing the state-owned petrochemical company and expressed intention to launch a privatization tender during the Summer. - Elektroprivreda Srbije (EPS): - New law on renewable energy sources adopted in April, replacing feed-in tariffs with a competitive auction system. - Electricity tariff increased by 3.4 percent in February but remains significantly lower than the EU average. - Mission reiterated need for cost recovery and to incorporate distributional impact of tariff increases. - Authorities plan to finalize conversion of the company into a joint-stock company by end-November 2022 (RT). - Srbijagas: - Authorities intend to complete operational unbundling and encouraged to convert the company into a joint-stock company. - Others: - Action plan for closing unviable Resavica coal mines while cushioning social impact in the vulnerable region. - Continue exploring options for potential strategic investments for chemical company MSK and privatization of bus company Lasta in 2021. ### Skills, return migration, and productivity (paragraph 28) - Challenges and priorities: - As unemployment has reached historically low levels, and given unfavorable demographic trends and pull of higher wages in EU countries, emphasis on productivity is imperative. - Authorities intend to continue focusing on digitalization to transition to a knowledge- and innovation-based economy, and note ongoing efforts to digitize the education system. - Staff welcomed authorities’ initiatives to encourage return migration following large-scale pandemic-related returns of Serbs who had been working abroad. ### Informal economy and tax administration (paragraph 30) - Findings and policy measures: - Size of Serbia’s grey economy remains high. - Authorities committed to curb the grey economy with a new action plan later this year prioritizing: improvements in the inspection system, modernization of the tax administration, strengthening incentives for voluntary compliance, and improving the business environment. - Large part of the grey economy reflects unregistered labor; staff encouraged planned expansion of the law on seasonal employment. ### Transition to a greener economy (paragraphs 31 and Box 2) - Context and impacts: - Costs associated with extreme climate and weather events have exceeded EUR 5 billion since 2000, with droughts and rising temperatures accounting for most losses (authorities’ estimate). - Energy sector centered on coal generates about 70 percent of total electricity in the country. - Policy actions and legislation: - Adoption of the Law on Climate Change in March to provide framework legislation; a low carbon development strategy and an action plan should be adopted within two years. - In March 2021, government adopted four bills in the energy sector to enhance energy efficiency and savings, enable new investments in renewables, increase transparency and competition in the energy market, and update mining sector regulations. - January 2021 rulebook on liquid fossil fuels expected to reduce SO2 emissions from heating and improve air quality. - February 2020 National Plan for the Reduction of the Main Pollutant Emissions from Old Large Combustion Plants adopted to support emissions reductions. - Financing and instruments: - Prioritizing green investments (including through the Serbia 2025 infrastructure investment program) and carbon pricing mechanisms can support job-rich growth and emissions reduction. - Implementation of an ambitious green agenda would require substantial public and private funding; EU institutions and Instruments for Pre-Accession Assistance (IPA) can play pivotal roles. - Introduction of innovative financial instruments (e.g. green bonds) with IFI support could lever private sector financing. ### Anti-corruption and AML/CFT (paragraph 32) - Needs and recommendations: - Strengthen the asset disclosure regime for high-level public officials. - Enhance capacity of anticorruption institutions and ensure credible prosecutions of false asset disclosures and other corruption offenses. - Continue work to demonstrate sustained improvement in effectiveness of AML/CFT framework, including beneficial ownership information and risk-based supervision. - Staff urged authorities to step up implementation of GRECO recommendations. - Authorities noted ongoing constitutional reforms to make the judiciary more independent, efficient and accountable and intentions to upgrade the judicial IT system; expect GRECO progress to be acknowledged during the first PCI review. ### Program modalities and reform pillars (paragraphs 33–35) - Objectives of the proposed new PCI: - Support recovery from the crisis, maintain macroeconomic stability, anchor the medium-term fiscal policy framework, and push structural reforms for more inclusive and sustainable growth. - Key reform pillars: - Anchoring the fiscal policy framework: new fiscal rules, implementation of a new employment framework, contain public wage costs, strengthen tax administration, implement PIM systems and fiscal risks monitoring, better controls of state aid, and updated accounting rules. - Strengthening SOE governance to ensure better monitoring, increased efficiency, and reduced fiscal risks. - Developing capital markets and further increasing dinarization: develop domestic sovereign and corporate bond markets, improve access to finance for SMEs, and implement regulatory steps to limit risks from unhedged FX lending. - Improving provision of social assistance: implement a new integrated social card registry, make social assistance more flexible, targeted and comprehensive. - Transition to a green economy: create legal framework for environmental and climate action, implement green infrastructure investments, and create incentives for a lower-carbon future. - Program details: - The attached Program Statement (PS) details authorities’ policy commitments under the 30-month PCI. - Serbia does not need the Fund’s financial assistance under the baseline and is not seeking financial assistance from the Fund. - Reviews set out in PS Table 1 with quantitative targets (QTs) monitored semi-annually: general government fiscal deficit, current primary expenditure of the Republican budget, domestic payment arrears, and the inflation consultation band. - Continuous target on non-accumulation of external debt payment arrears. - Proposed RTs for the next 12 months are presented in PS Table 2. - Conditionality expected to shift from fiscal reforms to structural and financial-sector reforms, including green agenda and social protection, with TA and IFI collaboration. - Risk assessment: - Risks to a new PCI are assessed to be moderate. - No balance of payments gap for the next 12 months and good prospects for adequate financing for the remaining program period. - Program risks elevated by pandemic-related uncertainties and the 2022 elections. ### Sovereign arrears (paragraph 36) - Serbia has small sovereign arrears outstanding related to Libya from 1981 due to unsettled government obligations for importing crude oil. - Authorities have been in contact with Libyan counterparts to resolve arrears; staff urged continued efforts to resolve these arrears as soon as possible. ### Staff appraisal (paragraphs 37–38) - Positive assessment: - Fiscal, monetary and financial sector measures provided vital support during the pandemic. - Low reliance on tourism and strong pre-crisis growth momentum helped limit negative effects. - Recovery appears to be strengthening; inflation is low and banking system stable and liquid. - Despite a large fiscal impulse, borrowing costs remain contained and public debt is sustainable around 60 percent of GDP. - Remaining risks and cautions: - Pandemic risks persist: uncertainties on pace and effectiveness of vaccinations regionally, and timing/scale of reopening. - Full impact on labor market and NPLs likely to manifest later in the year as wage subsidies, dismissal caps, and loan moratoriums expire. - Further policy initiatives may be needed to cushion renewed crisis effects while maintaining transparency and accountability and considering limited fiscal space. - Serbia’s external position remains broadly consistent with fundamentals and desirable policy settings. *REPUBLIC OF SERBIA INTERNATIONAL MONETARY FUND* ### 39. The new program will assist the authorities navigating through the crisis, while ### 39. The new program will assist the authorities navigating through the crisis, while ### Program objectives and immediate priorities - "The new program will assist the authorities navigating through the crisis, while advancing structural and institutional reforms to strengthen Serbia’s economic potential." - Immediate priorities: - "supporting the economy through the crisis" - "overseeing implementation and phase out of the large policy support package" - "monitoring risks" - Longer-term goals: - "fostering inclusive growth" - "maintaining financial stability" - Fiscal strategy as recovery takes hold: - "a return to small fiscal deficits and declining debt levels needs to be entrenched into the program to restore policy buffers." - "Spending increases on public sector wages and pensions should be tightly controlled." ### Green and digital transition - "The opportunity to build a greener and more digital economy should not be missed." - Policy guidance: - "avoid carbon-intensive investments." - "spending should be redirected to well-designed climate-smart infrastructures and technologies, and environmental protection projects, which can support near-term growth and limit the potential scarring effects of the crisis." ### Structural reforms and institutional strengthening - "Decisive actions should be taken to advance structural reforms and strengthen institutions." - Key reform priorities: - "Moving forward with reforms of Serbia’s large and inefficient SOEs remains critical, to strengthen their governance and improve their management." - "Enhancing the business environment—including by strengthening the rule of law, improving the efficiency of the judicial system, and curbing corruption—would help attract foreign as well as domestic investments." - "Encouraging dinarization and developing domestic capital markets would enhance financial deepening and support medium-term growth." ### Risks and vulnerabilities - "The program faces domestic and external risks beyond those stemming from pandemic." - Political and implementation risk: - "Ongoing progress in the structural reform agenda hinges on continued political consensus." - "After several years of engagement with the Fund—first under a precautionary SBA, then under a PCI—it will be important to maintain the reform momentum, including during the forthcoming election period." - External risks and policy implications: - "Serbia remains exposed to external shocks, including possible tighter global financing conditions." - "Gradually allowing for greater exchange rate flexibility could be beneficial to financial stability." *REPUBLIC OF SERBIA 22 INTERNATIONAL MONETARY FUND* ### 43. The PCI provides an appropriate instrument to support the authorities’ program. Staff ### 43. The PCI provides an appropriate instrument to support the authorities’ program. Staff ### Program financing and IMF engagement - Staff does not foresee a need for Fund financing during the program period. - Program reviews will: - test the authorities’ commitment to reforms during the program period, - provide the opportunity to adjust policies in light of developments. - Staff supports the authorities’ request for the PCI. - It is recommended that the next Article IV consultation with Serbia be held on the 24-month cycle, in accordance with Decision No. 14747-(1096) on consultation cycles. ### Real sector developments - Real GDP quarterly pattern: - "A strong rebound in 3Q2020, was followed by moderate growth in 4Q2020." - Domestic demand provided some drag amid pandemic-related uncertainty. - Industrial production: - "Industrial production has recovered from the shock in 2Q2020 and picked up again in 1Q2021." - Exports: - "Exports recovered along with activity in Europe." - Labor and consumption indicators: - "Net wages growth declined in the first two months of 2021." - "Retail trade growth in yoy terms strengthened in March." - Chart annotations and sources: Haver Analytics; SORS; and IMF staff calculations. ### Balance of payments and international reserves - Current account: - "The current account deficit continued to decline in 4Q2020." - "The current account remained covered by the FDI." - Other investments: - "Other investments were driven by trade credits and loans." - International reserves: - "International reserves increased since October, supported by non-resident investment in long-term dinar government securities and the Eurobond issuances." - Notes: BPM5 data spliced with BPM6 starting March 2013. Sources: Haver Analytics; and IMF Staff calculations. ### Financial and exchange rate developments - Sovereign risk and domestic securities: - "EMBI spreads continued to decline." - "Efforts to lengthen the maturity of domestic securities continued until the COVID-19 shock hit." - Exchange rate and FX interventions: - "The exchange rate against the euro remains stable." - "The NBS foreign exchange purchases during the pandemic abated since 4Q2020." - FX Interventions by NBS plotted in Euro millions (positive value indicates FX sale). - Yields: - "Yields for dinar-denominated securities remain low... similar to the yields for euro-denominated securities." - Data as of May 20, 2021 and Apr–May 2021 for specific series. Sources: National Bank of Serbia; Bloomberg. ### Inflation and monetary policy - Inflation dynamics: - "Headline inflation returned to the tolerance band in March... driven by higher energy prices." - Output gap: - "Preliminary estimates show a large output gap in 2020." - Inflation expectations: - "Inflation expectations remain well-anchored." - One-Year-Ahead Inflation Expectations series referenced; "12M expectated inflation as of May 2021." - Policy rate: - "The key policy rate was cut during 2Q2020 and has remained on hold since December 2020... and remains above most peer countries in real terms." - Contributions to annual inflation: Core, Energy, Food, Headline series from SORS. - Sources: National Bank of Serbia; SORS; Bloomberg; Haver Analytics; IMF staff calculations. ### Selected interest rate developments - Dinar interest rates: - "Monetary policy easing contributed to a decline in dinar interest rates on short-term deposits.... along with most bank lending rates in dinar." - FX and FX-linked rates: - "FX (and FX-linked) interest rates remain low.... with lower lending rates to corporates." - Series reported: Bank Lending Interest Rate (RSD), Term Deposit Rate (RSD), BELIBOR-1W, sector breakdowns (Average in All Sectors; Households and NPISH; Housing Loans; Corporate Sector). - Source: National Bank of Serbia. ### Fiscal developments - Revenues and spending: - "Revenues stabilized in 4Q2020 and continued to pick up in the first two months of 2021." - "Growth in state aid picked up due to the pandemic.... along with current spending." - Wages and pensions: - "Public sector wages are elevated, but the pension bill remains below 11 percent of GDP." - Wages and Pensions series shown in percent of GDP (12M sum). - Debt: - "Government debt picked up in 2020.... while currency composition remained broadly unchanged." - State aid definition: "State aid includes direct subsidies, net lending through the budget, assumption of SOE's debt, and the service of guaranteed debt called by creditors." - Sources: Ministry of Finance; IMF staff calculations. ### Labor market developments - Unemployment and participation: - "Unemployment picked up again in 4Q2020 .... and long-term unemployment persists." - "Labor market participation continued to improve in 4Q2020 .... along with employment growth." - Wages: - "Growth of net wages has slowed.... while public sector wages remain above private sector wages, on average." - Series and aggregates: Unemployment Rate (15-64), Long-term vs Short-term unemployment shares, Labor Participation Rate (15-64), Employment Rate (15-64), Net Wage Growth (Nominal and Real), Average Monthly Net Real Wages by sector. - Sources: Haver Analytics; ILO; OECD; Republic of Serbia National Employment Service; SORS; IMF staff calculations. ### Key statistics and projections (selected figures from tables) - Real GDP growth: - 2018: 4.5 - 2019: 4.2 - 2020: -1.5 - 2021 (Est.): -1.0 - 2022 (Proj.): 5.0 - 2023 (Proj.): 6.0 - Consumer prices (average): - 2018: 2.0 - 2019: 1.9 - 2020: 1.7 - 2021 (Est.): 1.6 - 2022 (Proj.): 1.9 - 2023 (Proj.): 2.5 - Fiscal balance (percent of GDP): - 2018: 0.6 - 2019: -0.2 - 2020: -8.9 - 2021 (Est.): -8.1 - 2022 (Proj.): -3.0 - 2023 (Proj.): -6.9 - 2024 (Proj.): -1.5 - 2025 (Proj.): -3.0 - 2026 (Proj.): -1.5 - Gross debt (percent of GDP): - 2018: 54.4 - 2019: 52.8 - 2020: 59.1 - 2021 (Est.): 58.4 - 2022 (Proj.): 57.7 - 2023 (Proj.): 60.3 - 2024 (Proj.): 55.5 - 2025 (Proj.): 58.9 - 2026 (Proj.): 56.0 - Current account balance (percent of GDP): - 2018: -4.8 - 2019: -6.9 - 2020: -5.7 - 2021 (Est.): -4.3 - 2022 (Proj.): -5.8 - 2023 (Proj.): -5.1 - 2024 (Proj.): -5.6 - 2025 (Proj.): -5.0 - 2026 (Proj.): -4.9 - Gross official reserves (billions of euro): - 2018: 11.3 - 2019: 13.4 - 2020: 13.4 - 2021 (Est.): 13.5 - 2022 (Proj.): 13.7 - 2023 (Proj.): 15.2 - 2024 (Proj.): 14.3 - 2025 (Proj.): 16.1 - 2026 (Proj.): 16.9 - External debt (percent of GDP): - 2018: 66.1 - 2019: 65.5 - 2020: 67.4 - 2021 (Est.): 70.9 - 2022 (Proj.): 64.3 - 2023 (Proj.): 70.6 - 2024 (Proj.): 61.4 - 2025 (Proj.): 68.0 - 2026 (Proj.): 64.8 - Nominal GDP (billions of dinars): - 2018: 5,073 - 2019: 5,418 - 2020: 5,524 - 2021 (Est.): 5,464 - 2022 (Proj.): 5,940 - 2023 (Proj.): 5,942 - 2024 (Proj.): 6,375 - 2025 (Proj.): 6,389 - 2026 (Proj.): 6,868 *Source: IMF staff; National authorities; Haver Analytics; SORS; National Bank of Serbia.* ### 1. Total financing requirement8.410.85.58.48.07.88.47.27.2 ### 1srbea2021002 - 1. Total financing requirement8.410.85.58.48.07.88.47.27.2 ### Total financing requirement (2018–2026; billions of euros) - Total financing requirement: 8.4 10.8 5.5 8.4 8.0 7.8 8.4 7.2 7.2 - Current account deficit: 2.1 3.2 2.0 2.5 2.7 2.8 3.1 3.3 3.5 - Debt amortization: 5.0 5.8 3.3 4.1 4.3 4.2 4.5 3.3 3.2 - Medium and long-term debt: 4.1 4.4 3.0 2.6 2.8 2.7 3.0 1.8 1.8 - Public sector: 3.1 3.4 2.3 1.8 1.6 1.6 2.4 1.4 1.4 - Of which: IMF: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Of which: Eurobonds: 1.0 1.5 0.2 0.6 0.0 0.0 0.0 0.0 0.0 - Of which: Domestic bonds (non-residents): 1.1 1.0 1.1 0.3 0.5 0.5 0.5 0.5 0.6 - Commercial banks: 0.3 0.4 0.3 0.3 0.5 0.5 0.4 0.2 0.1 - Corporate sector: 0.8 0.6 0.4 0.5 0.8 0.6 0.3 0.2 0.3 - Short-term debt: 0.8 1.4 0.3 1.5 1.5 1.5 1.5 1.5 1.5 - Public sector: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Commercial banks: 0.8 1.3 0.3 1.5 1.5 1.5 1.5 1.5 1.5 - Corporate sector: 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Change in gross reserves (increase=+): 1.3 1.9 0.3 1.7 1.0 0.8 0.8 0.6 0.5 ### Total financing sources (2018–2026; billions of euros) - Total financing sources: 8.4 10.8 5.5 8.4 8.0 7.8 8.4 7.2 7.2 - Capital transfers: 0.0 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Foreign direct investment (net): 3.2 3.6 2.9 3.1 3.3 3.5 3.7 3.9 4.2 - Portfolio investment (net) 1/: 0.0 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Debt financing: 5.0 7.1 6.0 6.7 5.3 4.9 4.6 4.1 4.0 - Medium and long-term debt: 4.2 5.7 5.7 5.2 3.8 3.4 3.1 2.6 2.5 - Public sector 2/: 2.4 3.9 4.4 4.2 2.3 2.2 2.3 2.0 2.0 - Of which: Eurobonds: 0.0 1.5 3.0 2.2 0.0 0.0 0.0 0.0 0.0 - Of which: Domestic bonds (non-residents): 1.3 1.2 0.7 0.7 0.8 0.7 0.7 0.7 0.7 - Commercial banks: 0.5 0.6 0.7 0.4 0.6 0.5 0.5 0.2 0.1 - Corporate sector: 1.3 1.1 0.7 0.6 1.0 0.7 0.3 0.3 0.3 - Short-term debt: 0.8 1.4 0.3 1.5 1.5 1.5 1.5 1.5 1.5 - Public sector: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Commercial banks: 0.8 1.3 0.3 1.5 1.5 1.5 1.5 1.5 1.5 - Corporate sector: 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Other net capital inflows 3/: 0.2 0.4 -3.4 -1.5 -0.6 -0.7 0.0 -0.7 -1.0 - o/w trade credit and currency and deposits: 1.5 0.5 2.9 1.5 0.6 0.7 0.0 0.7 1.0 1/ Only includes equity securities and financial derivatives. 2/ Excluding IMF. 3/ Includes all other net financial flows and errors and omissions. ### Total financing needs and memorandum items - Total financing needs: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Debt service: 5.6 6.4 3.9 4.8 4.9 4.7 4.9 3.7 3.5 - Interest: 0.7 0.6 0.7 0.7 0.5 0.5 0.4 0.4 0.3 - Amortization: 5.0 5.8 3.3 4.1 4.3 4.2 4.5 3.3 3.2 Sources: NBS; and Fund staff estimates and projections. ### General Government Fiscal Operations (Table 6a, nominal levels; Billions of RSD, 2018–2026 highlights) - Revenue (selected years): 2,105 2,279 2,224 2,255 2,423 2,480 2,634 2,645 2,810 2,855 3,043 3,259 3,492 - Taxes (selected years): 1,822 1,994 1,962 1,991 2,175 2,225 2,380 2,384 2,543 2,586 2,765 2,973 3,196 - Personal income tax: 179 204 202 204 228 236 248 244 264 264 287 314 344 - Social security contributions: 620 676 660 674 785 816 861 860 911 910 976 1,047 1,123 - Value-added taxes: 500 551 547 549 604 600 651 644 698 695 739 790 844 - Excises: 290 307 300 306 316 323 351 352 378 393 416 450 484 - Expenditure (selected years): 2,073 2,290 2,716 2,698 2,603 2,892 2,731 2,834 2,876 2,959 3,130 3,347 3,583 - Current expenditure: 1,845 2,002 2,379 2,353 2,234 2,428 2,339 2,380 2,489 2,505 2,653 2,835 3,031 - Wages and salaries: 469 516 576 579 606 616 640 638 679 675 714 755 799 - Interest: 109 109 111 110 114 114 118 121 127 134 140 154 166 - Capital expenditure: 199 266 287 293 345 430 351 402 361 417 437 465 507 - Fiscal balance (selected years): 32 -11 -492 -443 -180 -412 -97 -189 -66 -104 -87 -89 -91 - Financing (selected years): -321 149 244 318 0 412 97 189 66 104 87 89 91 - Memorandum: Gross public debt 6/: 2760 2859 3264 3189 3429 3584 3540 3762 3628 3845 3928 4006 4085 - Nominal GDP (billions of dinars): 5073 5418 5524 5464 5940 5942 6375 6389 6824 6868 7354 7881 8449 Sources: Ministry of Finance; and IMF staff estimates and projections. ### General Government Fiscal Operations (Table 6b, percent of GDP; 2018–2026 highlights) - Revenue (percent of GDP): 41.5 42.1 40.3 41.3 40.8 41.7 41.3 41.4 41.2 41.6 41.4 41.4 41.3 - Taxes (percent of GDP): 35.9 36.8 35.5 36.4 36.6 37.5 37.3 37.3 37.3 37.6 37.6 37.7 37.8 - Current expenditure (percent of GDP): 36.4 36.9 43.1 43.1 37.6 40.9 36.7 37.2 36.5 36.5 36.1 36.0 35.9 - Capital expenditure (percent of GDP): 3.9 4.9 5.2 5.4 5.8 7.2 5.5 6.3 5.3 5.3 6.1 5.9 6.0 - Fiscal balance (percent of GDP): 0.6 -0.2 -8.9 -8.1 -3.0 -6.9 -1.5 -3.0 -1.0 -1.5 -1.2 -1.1 -1.1 - Gross financing need (percent of GDP): 8.8 10.7 15.5 15.0 8.7 12.2 7.8 9.3 7.1 8.1 7.1 5.4 5.1 - Gross public debt (percent of GDP): 54.4 52.8 59.1 58.4 57.7 60.3 55.5 58.9 53.2 56.0 53.4 50.8 48.4 Sources: Ministry of Finance; and IMF staff estimates and projections. ### Monetary Survey (Table 7; selected levels and indicators, 2018–2026) - Net foreign assets (levels): 11 16 12 8 7 13 0 13 4 7 13 23 16 0 1 1 6 0 0 0 (as listed: 1116128713001347132316011391174414801851194820332108) - Net foreign assets (in billions of euro): 9.4 11.0 11.0 11.5 11.1 13.5 11.6 14.6 12.3 15.4 16.2 16.8 17.4 - Foreign assets (levels): 161 618 311 843 1924 1875 2190 1950 2343 2046 2458 2566 2659 2741 (as listed) - Net domestic assets (levels): 1,435 1,486 1,828 1,938 2,026 1,982 2,202 2,118 2,396 2,302 2,513 2,760 3,038 - Domestic credit (levels): 2,552 2,643 3,124 3,090 3,387 3,295 3,630 3,488 3,900 3,729 4,003 4,329 4,687 - Non-government sector: 2,235 2,437 2,705 2,731 2,891 2,902 3,127 3,049 3,391 3,254 3,497 3,787 4,109 - Households: 1,018 1,112 1,227 1,244 1,309 1,319 1,414 1,383 1,530 1,474 1,581 1,710 1,853 - Enterprises: 1,188 1,291 1,440 1,453 1,542 1,547 1,671 1,628 1,814 1,740 1,872 2,030 2,204 - Broad money (M2) (levels): 2551 2774 3128 3285 3353 3493 3583 3593 3836 3386 2347 941 46... (as listed: 2551277431283285334935833593386238764153446147935146) — source table lists M2 composite levels; also reported in euros: - M2 (in billions of euro): 13.4 13.9 14.5 15.1 15.4 16.0 16.2 17.0 17.1 18.2 19.4 20.7 22.0 - Memorandum items: - Velocity (Dinar part of money supply): 5.3 4.8 3.9 3.6 3.9 3.5 3.9 3.5 3.8 3.5 3.5 3.4 3.4 - Deposit euroization (percent of total): 66.9 63.7 59.7 58.9 59.5 57.8 58.9 57.5 58.1 57.3 57.1 57.0 56.8 - Credit euroization (percent of total): 66.9 66.7 65.7 62.0 64.9 61.2 64.1 60.4 63.1 59.4 58.4 57.4 56.4 Sources: National Bank of Serbia; and IMF staff estimates and projections. ### NBS Balance Sheet (Table 8; selected items, 2018–2026) - Net foreign assets (levels): 1339 1583 1565 1597 1618 1809 1693 1937 1762 2033 2313 1221 1228 1 (as listed) - Net foreign assets (in billions of euro): 11.3 13.5 13.2 13.6 13.6 15.2 14.2 16.2 14.7 17.0 17.7 18.3 18.8 - Gross foreign reserves: 1342 1585 1568 1598 1622 1812 1696 1940 1766 2036 2135 2214 2284 - Net domestic assets: -607 -806 -619 -625 -603 -704 -596 -742 -568 -745 -745 -719 -675 - Reserve money (levels): 732 777 946 973 1,015 1,106 1,097 1,195 1,194 1,288 1,386 1,492 1,606 - Currency in circulation: 183 210 260 267 280 298 304 323 334 349 377 406 438 - Commercial bank reserves: 269 341 430 431 463 524 503 568 553 613 661 713 769 - FX deposits by banks (billions of euros): 2.4 1.9 2.2 2.3 2.3 2.4 2.4 2.5 2.6 2.7 2.9 3.1 3.3 Sources: National Bank of Serbia; and IMF staff estimates and projections. ### Banking Sector Financial Soundness Indicators (Table 9; selected indicators) - Regulatory capital to risk-weighted assets: 21.8 22.6 22.3 23.4 22.7 22.7 22.4 22.4 22.4 - Nonperforming loans to total gross loans: 17.0 9.8 5.7 4.1 4.0 3.7 3.4 3.7 3.8 - Return on assets: 0.7 2.1 2.2 1.8 1.8 1.4 1.4 1.1 1.2 - Return on equity: 3.3 10.5 11.3 9.8 10.5 8.4 8.2 6.5 7.3 - Customer deposits to total (noninterbank) loans: 108.1 106.9 110.6 109.2 106.8 111.7 112.9 116.4 115.7 - Foreign-currency-denominated loans to total loans: 69.4 67.5 68.5 67.1 68.7 66.7 65.4 64.7 64.5 - IFRS provision for NPLs to gross NPLs: 67.8 58.1 60.2 61.5 61.4 62.6 62.4 59.0 57.8 Source: National Bank of Serbia. ### Indicators for Monitoring Progress Towards SDGs (Table 10; selected indicators) - Proportion of population living below the national poverty line (%): 25.9 25.7 (latest available year noted as 2016) - Proportion of population covered by social assistance programs (%): 11.3 13.4 (latest available year) - Proportion of population using safely managed drinking water services (%): 74.6 74.7 74.7 74.7 - Proportion of population using safely managed sanitation services (%): 26.6 25.1 24.4 24.7 - Unemployment rate (%): 20.9 19.2 17.7 9.0 (latest available year 2020) - Carbon dioxide emissions per unit of manufacturing value added (kg CO2 per constant 2010 US dollars): 1.2 0.8 0.5 0.6 - Total official development assistance for technical cooperation (millions of 2016 US dollars): 284.3 178.7 179.9 304.6 Source: UN SDG Indicators Global Database; National Authorities. ### Schedule of Reviews Under the Policy Coordination Instrument, 2021–2023 (Table 11) - Board Discussion of the PCI Request: June 21, 2021 - First Review: October 1, 2021 - Second Review: April 1, 2022 - Third Review: October 1, 2022 - Fourth Review: April 1, 2023 - Fifth Review: October 1, 2023 _Sources: NBS; and Fund staff estimates and projections._ ### Annex I. Response to Past Policy Advice ### Annex I. Response to Past Policy Advice ### Fiscal Policy: 2019 Article IV Recommendations — Policy Actions - Preserve fiscal sustainability; prioritize fiscal space towards productive capital investments and reduce the tax burden on labor and businesses. - Fiscal discipline was essentially maintained, but the budget deficit and debt have increased in the context of COVID-19 through temporary measures. - Healthy levels of public investment have been maintained. - No changes to the design of the tax system have been made. - Implement public wage system and public employment reforms. - Both reforms were delayed due to COVID-19. - The public employment system was improved, with assistance from the World Bank (WB), to increase flexibility. - During the transition to a final regime, the Employment Commission will continue to allow the hiring of staff within the institutions’ budget limits. - Reintroduce pension indexation through the Swiss indexation formula beginning January 2020. - Completed. - Implement rigorous selection and appraisal procedures to ensure investments offer the greatest boost to potential growth. - A Manual for Project Preparation and Appraisal has been prepared, and a single pipeline is being implemented, but implementation capacity remains incomplete. - Prepare a strategy and methodology to properly monitor fiscal risks by June 2020. - Reform delayed due to COVID-19; remains in progress, to be completed by September 2021 (in line with the timeline for WB technical assistance). - Introduce a fiscal rule anchored on debt. - Delayed due to COVID-19. ### Monetary and Exchange Rate Policies: 2019 Recommendations — Policy Actions - Gradually mop up excess liquidity in the banking system through repo operations; move the NBS repo rate closer to the key policy rate to improve the signaling role of policy rates and further develop the interbank market. - Excess dinar liquidity remained, in line with updated staff advice, in light of the pandemic crisis. - Develop greater two-way exchange rate movement gradually over the medium term. - Relative stability of the exchange rate maintained in the context of heightened uncertainty due to the pandemic. - Apply higher risk weights to unhedged foreign currency exposures. - A bank survey was completed and new macroprudential measures to limit corporate FX borrowing were prepared, but not yet implemented due to the pandemic. ### Financial Sector Policies: 2019 Recommendations — Policy Actions - Advance the state-owned financial institutions (SOFI) agenda. - Privatization of largest state-owned bank was completed in 2020. - Authorities continue to implement the new strategy for Banka Poštanska Štedionica (BPS). - Resolve the remaining portfolio of bad assets managed by the Deposit Insurance Agency (DIA). - Sale of the first portfolio completed in June 2019. - Sale of the second, larger portfolio of assets completed in 2021. - Improve capital markets and access to development finance. - Development of a strategy and action plan was delayed due to the pandemic. ### Structural Policies: 2019 Recommendations — Policy Actions - Ensure opportunities for skilled workers to limit migration of skilled labor; strengthen institutions and improve the business environment. - Limited progress, including tax incentives for R&D and return migration. - Press ahead with resolution and reform of the SOE sector. - Implementation mixed. - Tender to value property and assets of Elektroprivreda Srbije (EPS) launched in November 2020; contract with an appraiser signed in April 2021 aiming to complete valuation by end-November 2021. - Privatization tender for Petrohemija has not yet been launched. - Improve governance of the SOE sector. - Comprehensive list of SOEs with at least a 10 percent government stake published in October 2019. - Government decisions on key reforms adopted in December 2020. - Government adopted a full ownership policy document in April 2021; a time-bound action plan to implement it has been delayed to June 2021. - Address outstanding recommendations from GRECO fourth evaluation round and concerns about undue influence over the judiciary. - As of November 2020: 2 of the 13 recommendations implemented satisfactorily, 10 partially implemented, 1 not implemented. --- ### Annex II. Conditionality Under the 2018 Policy Coordination Instrument ### Summary Table of Reform Targets, Objectives, and Status - Fiscal - 1 Approve a government decree defining wage coefficients under the new Public Sector Employee Wage System for local governments, public services, and public administration. - Objective: Rationalize pay and improve incentives across public sector. - Status: Not completed - 2 Adopt a government decision on a revised public employment framework for 2020. - Objective: Improve employment flexibility while containing fiscal pressures. - Status: Dropped, but less comprehensive reform still adopted - 3 Prepare methodologies to: (i) monitor fiscal risks from SOEs and natural disasters, and (ii) manage fiscal risks associated with the state-guarantee scheme designed in response to the COVID-19 crisis. - Objective: Reduce fiscal risks. - Status: Completed with delay - 4 Submit to the National Assembly a draft Law on Charges. - Objective: Improve transparency and predictability, reduce parafiscal tax burden on businesses. - Status: Completed with delay - 5 Issue a detailed rule book to the 2017 Capital Project Regulation, covering methodology for project appraisal and selection. - Objective: Unify methodology for project and cost-benefit analysis and raise transparency. - Status: Completed with delay - 6 Establish Capital Investment Commission (CIC) and update Capital Project Regulation to (i) clarify roles of MoF, CIC, and other line ministries, (ii) remove the exclusion of IPA-funded projects, and (iii) expand the coverage to government-to-government agreements. - Objective: Improve selection, appraisal, and implementation of public infrastructure projects. - Status: Completed with delay - 7 Complete consolidation of core STA activities into fewer sites. - Objective: Advance reforms of the State Tax Administration. - Status: Completed - 8 Reach decision on a preferred approach to the STA IT system upgrade. - Objective: Advance reforms of the State Tax Administration. - Status: Completed - Structural - 9 Adopt a government decision to launch a privatization tender for Petrohemija. - Objective: Reduce fiscal risks. - Status: Not completed - 10 Launch a tender for the valuation of EPS property and assets. - Objective: Improve SOE governance. - Status: Completed with delay - 11 Government adoption of an ownership policy document and a time-bound action plan to implement it. - Objective: Improve SOE governance. - Status: Not completed, but key decisions adopted - 12 Approve amendments to the Law on Inspection Supervision. - Objective: Reduce grey economy. - Status: Completed with delay - 13 Publication of a comprehensive list of SOEs as of December 31, 2018 (covering all levels of government including consolidated ownership; include information on main economic activity; at least 10 percent government ownership stake). - Objective: Improve SOE governance. - Status: Completed - Financial - 14 Approve a time-bound action plan to resolve part of the DIA portfolio of bad assets by end-2020 through a tendering process implemented in two phases (agreed with the World Bank); and complete the first phase of the sale. - Objective: Resolve bad assets and address fiscal risks. - Status: Completed with delay - 15 Approve an updated Dinarization Strategy in line with the IMF recommendations. - Objective: Strengthen financial stability and increase dinarization. - Status: Completed - 16 Submit to the National Assembly amendments to the Law on Public Debt with a view to update legal foundation of debt management. - Objective: Strengthen public debt management. - Status: Completed - 17 Implement items listed in Serbia's action plan to address the significant AML/CFT weaknesses identified by the FATF. - Objective: Remove Serbia from FATF listing and prevent pressures on capital inflows and correspondent banking relationships. - Status: Completed - 18 (i) Submit to the National Assembly amendments to the Law on Deposit Insurance Agency and the Law on Deposit Insurance to incorporate the findings of IADI assessment and update parametrization; and (ii) introduce risk-based premia. - Objective: Align deposit insurance scheme with international standards. - Status: Completed with delay - 19 Launch a privatization tender for Komercijalna Banka. - Objective: Reduce state involvement in the financial sector and reduce fiscal risks. - Status: Completed - 20 Issue tenders for the second phase of DIA asset sales, in line with the time-bound action plan. - Objective: Resolve bad assets. - Status: Completed - 21 Sign an updated MOU between the DIA and NBS to reflect new resolution tools given to the NBS and the need for information sharing. - Objective: Strengthen financial safety nets. - Status: Completed --- ### Annex III. Risk Assessment Matrix ### Key Risks, Likelihoods, Time Horizons, Impacts, and Policy Responses - Unexpected shifts in the COVID-19 pandemic - Relative Likelihood: Medium - Time Horizon: Short term - Impact if Realized: High — A prolonged pandemic could lead to setbacks to economic recovery and risks reaching the limits of fiscal space for supporting the economy, negatively affecting companies and individuals. - Policy Response: - Extend fiscal support measures and target to companies and individuals most in need. - Maintain accommodative monetary policy stance and liquidity in the banking system. - Gradually unwind policy support while ensuring that recovery is well entrenched. - Alternate scenario: Faster containment (Short term, High) — Domestic and external demand pick up, boosting economic activity, employment, and reducing uncertainty. - Sharp rise in global risk premia exposes financial and fiscal vulnerabilities - Relative Likelihood: Medium - Time Horizon: Short- to medium term - Impact if Realized: High — Tighter global financing conditions could push up the cost of borrowing, put stress on leveraged firms and households, lower confidence, and prolong the downturn. - Policy Response: - Maintain a relatively large liquidity buffer and measures to keep domestic markets liquid. - Fiscal discipline and decisive progress on structural reforms should anchor confidence and improve competitiveness. - Accelerating de-globalization - Relative Likelihood: Medium - Time Horizon: Short- to medium term - Impact if Realized: Medium — Reduced trade and FDI, and increased capital flows volatility would adversely impact Serbian economy. - Policy Response: - Allow for greater exchange rate flexibility over the medium-term. - Progress on structural reforms to anchor confidence and improve competitiveness. - Maintain financial stability to weather external shocks. - Domestic policy errors or loss of fiscal discipline - Relative Likelihood: Medium - Time Horizon: Short- to medium term - Impact if Realized: High — Loss of fiscal discipline would undermine market confidence and the restoration of fiscal buffers; unfinished structural reform agenda would reduce growth prospects. - Policy Response: - Maintain strong fiscal and structural reform policies and strengthen institutions. - Address weaknesses in the labor market, enhance SOE governance, and reduce the size of the informal economy. --- ### Annex IV. Chronology of COVID-19 Measures in Serbia ### Table 1 Summary of Fiscal Response to COVID-19 (selected measures and magnitudes) - First wave of measures: 6.9 percent of GDP (2020) - Second wave of measures: 1.4 percent of GDP - Third wave of measures: 4.8 percent of GDP - Examples of individual measures and reported fiscal magnitudes: - Universal cash transfer: 1.3 percent of GDP - Deferement of labor taxes and SSC: 0.5 percent of GDP - One-off payment to pensioners: 0.1 percent of GDP - One-off fiscal support to hotels / Bonus to public-sector health workers / One off payment to pensioners: 0.15 percent of GDP - Minimum wage subsidies (additional three months): 1.2 percent of GDP - Minimum wage for employees in travel and hospitality: 0.05 percent of GDP - Universal cash transfer (paid in May and December 2021): 0.7 percent of GDP - Pension bonus (paid in December 2021): 0.1 percent of GDP - Expansion of the existing State Guarantee Scheme: 1 percent of GDP (guarantee cap) - New lending scheme to support vulnerable companies: 1 percent of GDP (guarantee cap) - Third wave measures component entries: 0.7 percent of GDP; 0.02 percent of GDP; 0.02 percent of GDP - Additional smaller entries: 0.2 percent of GDP; 1.1 percent of GDP; 0.4 percent of GDP; 0.2 percent of GDP; 1 percent of GDP (guarantee cap); 1.8 percent of GDP; 1.8 percent of GDP ### Table 2 COVID-19 Measures for the Monetary and Financial Sectors (selected actions and key policy rate changes) - Key policy rate movements (2020–2021): - Cut by 0.5 pp to 1.75 percent - Cut by 0.25 pp to 1.5 percent - Cut by 0.25 pp to 1.25 percent - Cut by 0.25 pp to 1 percent - Other monetary and financial measures: - Rate corridor narrowed from ±1.25 pp to ±1.0 pp, and later from ±1 pp to ±0.9 pp - Lower interest rate on FX swaps - Additional swap auctions, 3-month maturity (weekly basis in 2021) - Support to dinar liquidity: auctions of repo purchase of government securities (weekly basis), 3-month maturity; outright purchase of government securities in the secondary market - Precautionary line with the ECB; a precautionary repo line with the ECB established to supply additional euro liquidity to local banks - Corporate bonds included in the list of eligible collateral in NBS monetary operations (2021) - Approval of dinar loans under the Guarantee Scheme at lower interest rates (minimum 50 bp reduction compensated by the NBS through higher remuneration rate on allocated required reserves) - Moratorium on debt repayments for debtors unable to settle liabilities due to the pandemic (extension of the repayment period) - Reduction of mandatory downpayment for first-time home buyers; reduction of the minimum degree of completion of a building eligible for financing through bank housing loans - Extension of repayment term for housing loans by up to five years; extension of repayment term for household loans (except housing) by up to eight years - Until end-2021, banks allowed to extend household dinar loans only based on signed statement on employment/pension --- ### Annex V. External Sector Assessment ### Overall Assessment and Policy Implications - Overall Assessment: Serbia’s external position in 2020 was broadly in line with the level implied by medium-term fundamentals and desirable policies, based on the results of the IMF’s EBA-lite current account model. - The CA deficit in 2020 was smaller than in 2019 reflecting adjustments in all its components. - Potential Policy Responses: - Continue macroeconomic policies to support the economy, address the impact of the Coronavirus, and facilitate the recovery. - Over the medium term, structural fiscal reforms important to rebuild fiscal buffers and anchor fiscal performance. - An ambitious structural reform agenda needed to underpin high and inclusive growth. ### Foreign Assets and Liabilities: Position and Trajectory - Background: - Serbia’s net international investment position (NIIP) has remained highly negative. - NIIP increased to -92.6 percent of GDP in 2020 from -88 percent of GDP in 2019. - NIIP in 2020 is below the -44.1 percent of GDP average of countries in the region. - Structure indicates FDI inflows contributed much to the buildup of equity within net FDI liabilities—main IIP component—standing at 82.4 percent of GDP in 2020. - Local currency debt held by nonresidents has remained below 5 percent of GDP. - Nearly all net foreign liabilities are long-term in maturity. - Assessment: - Under the current baseline scenario, the NIIP does not deteriorate in net present value terms (i.e., the NIIP is sustainable based on this definition). - Serbia’s NIIP position mostly reflects past inward FDI; continuous efforts to improve competitiveness could help improve this position. - Suggested measures include further reforms to ease doing business and attract investments in sectors that produce higher-technology goods with higher-skilled labor, including by domestic investors, to increase productivity of the tradable sector. - These reforms should be supported by a prudent fiscal policy over the medium term to ensure public savings and preserve wage competitiveness. ### 2020 (% GDP) Key External Position Figures - NIIP: -92.6 - Gross Assets: 60 - Debt Assets: 52.2 - Gross Liab.: 152.6 - Debt Liab.: 15.1 *Source: IMF staff compilation of Annexes I–V of the Serbia country report content unit.* ### 6.9 percent in 2019), largely as a result of a sharply lower primary income deficit. From a ### 1srbea2021002 - 6.9 percent in 2019), largely as a result of a sharply lower primary income deficit. From a ### Current Account (CA) developments and assessment - CA deficit narrowed substantially since 2008 (19.9 percent of GDP in 2008) and was 6.9 percent in 2019, with continued narrowing driven mainly by a continuous increase in exports of goods and an improving services balance over the last 6 years. - Pandemic impact and 2020 specifics: - Primary income deficit decreased by 43.3 percent in 2020. - Profits earned by foreign companies declined by 44.8 percent in 2020. - Compared with the past 5-year average, the income deficit in terms of GDP was 2.2 percentage points smaller in 2020. - IMF EBA-lite current account model findings: - Adjusted current account deficit (including adjustor for the sharply lower primary income deficit): 5.5 percent of GDP. - Current account norm: -5.9 percent of GDP. - Model-estimated current account gap: 0.4 percent of GDP. - Covid-19 adjustor: -0.5 percent (reflecting temporary effects on CA of tourism, 0.08 percent, and of the oil trade shock, -0.59 percent). - Policy gaps contribute 3.5 percentage points to the model-estimated current account gap; the remainder reflects unidentified country-specific factors and/or regression residuals. ### Real Exchange Rate (REER) background and assessment - 2020 nominal and real effective exchange rate indexes: - Nominal effective exchange rate appreciated on average by 2½ percent during 2020. - Real effective exchange rate appreciated on average by 2.7 percent during 2020. - End-December 2020 REER was 4.6 percent stronger than end-2019 and 8.2 percent above the post-global financial crisis average. - Model and indicator-based assessment: - Assuming an elasticity of -0.38, the IMF staff CA gap of 0.4 percent of GDP implies a REER gap of 0.9 percent. - IMF’s EBA-lite Index-Real Effective Exchange Rate model suggests the need for a more depreciated exchange rate. - Since 2015, increases in real wages have exceeded productivity growth, creating pressures for REER appreciation. - Considering model results, competitiveness indicators, macroeconomic context, and NIIP level, the REER gap is assessed to be in the range [-0.9, 18.1]. ### Capital and Financial Accounts; FX intervention and reserves - Capital and financial flows: - Net FDI and portfolio inflows dominate the financial account. - Net FDI inflows reached 7.8 percent of GDP in 2019 and declined to 6.2 percent of GDP in 2020. - Serbia placed two Eurobonds in 2020 totaling EUR 3 billion (6.3 percent of GDP). - There are no CFMs. - Assessment: Over the medium term, the CA is expected to remain in line with historical levels and fully covered by FDI, but risks exist from decelerating FDI and portfolio inflows driven by the pandemic and external disruptions. - Foreign exchange reserves and interventions: - Foreign exchange reserves at end-2020: EUR 13.5 billion, or 5.4 months of prospective imports. - Central bank interventions: substantial net sales in first half of 2020; net purchases in November and December 2020; small net sales in January 2021 (seasonal pattern). - Reserves adequacy: gross reserves at end-2020 corresponded to 126 percent of the ARA metric (assuming the current stabilized de-facto exchange-rate classification). - Gross financing needs composition (2021 estimate): 12.2 percent of GDP, fully covered by: - Issuance on domestic and international markets: 8.7 percent of GDP. - Project loans and budget support from IFIs: 2.4 percent of GDP. - Deposits drawdown: 1.2 percent of GDP. ### Debt Sustainability Analysis — overview and baseline projections - Public debt dynamics and 2020 impact: - Public debt increased by 5.6 percentage points in 2020 to 58.4 percent of GDP, primarily due to fiscal financing needs from the COVID-19 economic support package. - Contingent liabilities broadly unchanged at around 3 percent of GDP. - Baseline projections and macro assumptions: - Public debt projected to increase marginally to around 60 percent of GDP in 2021, then decline gradually thereafter. - DSA baseline aligned with staff macro projections: - Real GDP rebound in 2021: 6 percent. - Fiscal deficit projected for 2021: 6.9 percent of GDP (from 8.1 percent in 2020). - Over the medium term: output gap expected to gradually close; inflation to remain within NBS tolerance band; fiscal deficit to narrow towards 1 percent of GDP. - Gross financing needs and portfolio: - Gross financing needs in 2021 estimated at 12.2 percent of GDP (breakdown above). - Debt held by non-residents exceeds 60 percent. - Share of debt denominated in foreign currency: 69 percent (49 percent is in euro). - Mitigating factors: large share of multilateral and institutional creditors, long average maturity of outstanding debt, fixed interest rate structure (about 86 percent of debt with fixed interest rate). - Residual maturity: above 2 years for more than 70 percent of dinar-denominated debt and 60 percent of euro-denominated debt. - Short-term paper issuance resumed in 2020 but remains small at 0.5 percent of GDP. ### DSA risks, stress tests, and realism of assumptions - Main vulnerabilities and risks: - Concentration in large shares of foreign currency debt and debt held by non-residents. - Elevated external financing needs, just above the 15 percent threshold for EM economies. - Risks from possible loss of fiscal discipline, negative growth shocks, and exchange rate volatility. - Stress test results and implications: - Historical scenario: debt remains on an increasing trajectory and financing needs are significantly higher than under the baseline. - Currency depreciation shock: would create quickly rising debt levels and financing needs (given large share of foreign currency-denominated debt). - Interest rate shock: moderate effects due to favorable interest rate structure. - Calibrated contingent liabilities shock: increases gross financing needs by about 4 percent of GDP in 2022. - Combined macroeconomic shock: public debt reaches 70 percent of GDP. - Forecast errors and baseline realism: - Forecast errors for real GDP growth have been large in some years (2009, 2012, 2014) due to sharp shocks; since 2015 growth typically higher than projected. - Primary balance projection errors have been positive in recent years (better fiscal outcomes than budgeted). - DSA assumes a fiscal multiplier of 0.5. - Projected 3-year average cyclically adjusted primary balance remains comfortably below the top quartile of the distribution. - Planned fiscal adjustment over any three years during the projection horizon exceeds 3 percent of GDP following the large pandemic deficit in 2020. ### Baseline scenario numerical highlights (as presented) - Nominal gross public debt (percent of GDP): 2019: 57.5; 2020: 52.8; 2021: 58.4; 2022: 60.3; 2023: 56.0; 2024: 53.4; 2025: 50.8; 2026: 48.4. - Public gross financing needs (percent of GDP): 2019: 12.9; 2020: 10.7; 2021: 15.0; 2022: 12.6; 2023: 9.5; 2024: 8.3; 2025: 7.3; 2026: 5.4. - Real GDP growth (percent): 2019: 1.7; 2020: 4.2; 2021: -1.0; 2022: 6.0; 2023: 4.5; 2024: 4.5; 2025: 4.0; 2026: 4.0. - Inflation (GDP deflator, percent): 2019: 4.1; 2020: 2.4; 2021: 1.8; 2022: 2.6; 2023: 2.9; 2024: 2.9; 2025: 3.0; 2026: 3.0. - Effective interest rate (percent): 2019: 4.7; 2020: 4.2; 2021: 4.1; 2022: 3.8; 2023: 3.8; 2024: 4.0; 2025: 4.1; 2026: 4.4. - Change in gross public sector debt (percent of GDP): 2019: 2.3; 2020: -1.6; 2021: 5.6; 2022: 1.9; cumulative 2019–2026: -10.0. - Identified debt-creating flows (percent of GDP): 2019: 1.8; 2020: -1.9; 2021: 6.5; 2022: 1.0; cumulative 2019–2026: -8.5. - Primary deficit (percent of GDP): 2019: 1.2; 2020: -1.8; 2021: 6.1; 2022: 5.0; cumulative 2019–2026: 3.0. - Primary (noninterest) revenue and grants (percent of GDP): 2019: 39.5; 2020: 42.1; 2021: 41.3; 2022: 41.7; 2023: 41.4; 2024: 41.6; 2025: 41.4; 2026: 41.5; cumulative 49.1. - Primary (noninterest) expenditure (percent of GDP): 2019: 40.6; 2020: 40.3; 2021: 47.4; 2022: 46.8; 2023: 42.4; 2024: 41.1; 2025: 40.7; 2026: 40.6; cumulative 52.1. - Automatic debt dynamics contribution (percent of GDP): 2019: 0.6; 2020: -1.4; 2021: 1.6; 2022: -2.6; cumulative 2019–2026: -10.9. - Of which: real interest rate contribution (percent): 2019: 0.6; 2020: 0.9; 2021: 1.2; 2022: 0.6; cumulative 3.3. - Of which: real GDP growth contribution (percent): 2019: -0.9; 2020: -2.2; 2021: 0.5; 2022: -3.2; cumulative -14.2. - Exchange rate depreciation contribution (percent): 2019: 1.0; 2020: -0.1; 2021: -0.1. - Other identified debt-creating flows (percent): 2019: 0.1; 2020: 1.3; 2021: -1.2; 2022: -1.4; cumulative -0.7. - Privatization/Drawdown of Deposits (reduces financing need, percent): 2019: -0.8; 2020: 0.9; 2021: -1.6; 2022: -1.3; cumulative -0.7. - Contingent liabilities (percent of GDP): 2019: 0.9; 2020: 0.4; 2021: 0.5. - Residual, including asset changes (percent of GDP): 2019: 0.5; 2020: 0.3; 2021: -0.9; 2022: 0.9; cumulative -1.5. *International Monetary Fund (source PDF content).* ### Annex VI. Figure 5. Serbia: Public DSA – Stress Tests ### 1srbea2021002 - Annex VI. Figure 5. Serbia: Public DSA – Stress Tests ### Macro-fiscal stress-test scenarios and underlying assumptions - Baseline real GDP growth: 6.0 in 2021; 4.5 in 2022; 4.5 in 2023; 4.0 in 2024; 4.0 in 2025; 4.0 in 2026. - Baseline inflation: 2.6 in 2021; 2.9 in 2022; 2.9 in 2023; 3.0 in 2024; 3.0 in 2025; 3.1 in 2026. - Baseline primary balance (in percent of GDP): -5.0 in 2021; -2.8 in 2022; -1.3 in 2023; 0.8 in 2024; 0.9 in 2025; 1.0 in 2026. - Baseline effective interest rate: 3.8 in 2021; 3.8 in 2022; 4.0 in 2023; 4.2 in 2024; 4.5 in 2025; 4.6 in 2026. Stress scenarios (selected series preserved exactly as presented) - Primary Balance Shock: Real GDP growth: 6.0, 4.5, 4.5, 4.0, 4.0, 4.0 (2021–2026). Inflation: 2.6, 2.9, 2.9, 3.0, 3.0, 3.1. Primary balance: -5.0, -2.8, -1.3, 0.8, 0.9, 1.0. Effective interest rate: 3.8, 3.8, 4.0, 4.2, 4.5, 4.6. - Real GDP Growth Shock: Real GDP growth: 6.0, 2.3, 2.3, 4.0, 4.0, 4.0. Inflation: 2.6, 2.4, 2.3, 3.0, 3.0, 3.1. Primary balance: -5.0, -2.2, -1.8, 0.8, 0.9, 1.0. Effective interest rate: 3.8, 3.8, 4.0, 4.2, 4.5, 4.6. - Real Interest Rate Shock: Real GDP growth: 6.0, 4.5, 4.5, 4.0, 4.0, 4.0. Inflation: 2.6, 2.9, 2.9, 3.0, 3.0, 3.1. Primary balance: -5.0, -1.1, 0.5, 0.8, 0.9, 1.0. Effective interest rate: 3.8, 3.8, 4.3, 4.8, 5.4, 5.8. - Real Exchange Rate Shock: Real GDP growth: 6.0, 4.5, 4.5, 4.0, 4.0, 4.0. Inflation: 2.6, 6.5, 2.9, 3.0, 3.0, 3.1. Primary balance: -5.0, -1.1, 0.5, 0.8, 0.9, 1.0. Effective interest rate: 3.8, 4.0, 3.9, 4.0, 4.3, 4.4. - Combined Shock: Real GDP growth: 6.0, 2.3, 2.3, 4.0, 4.0, 4.0. Inflation: 2.6, 2.4, 2.3, 3.0, 3.0, 3.1. Primary balance: -5.0, -2.8, -1.8, 0.8, 0.9, 1.0. Effective interest rate: 3.8, 4.0, 4.2, 4.7, 5.3, 5.6. - Contingent Liability Shock: Real GDP growth: 6.0, 2.3, 2.3, 4.0, 4.0, 4.0. Inflation: 2.6, 2.4, 2.3, 3.0, 3.0, 3.1. Primary balance: -5.0, -6.6, 0.5, 0.8, 0.9, 1.0. Effective interest rate: 3.8, 4.1, 4.2, 4.3, 4.6, 4.7. Observed and projected public debt and financing metrics (charts indicated) - Gross Nominal Public Debt (in percent of GDP): baseline and scenarios plotted for 2021–2026 (figures show ranges up to at least 180 percent of revenue scale for scenarios). - Gross Nominal Public Debt (in percent of Revenue): series graphed for 2021–2026 (scales up to at least 180 percent). - Public Gross Financing Needs (in percent of GDP): projected across scenarios for 2021–2026 (scales up to at least 18 percent). ### External debt sustainability: summary findings and projections (Annex VII) - Overall assessment: "Serbia’s external debt is assessed to be sustainable over the medium term, although the COVID-19 pandemic temporarily influenced its path adversely relative to pre-pandemic projections." - Projected external-debt-to-GDP ratio: increased to 70.9 in 2020; projected to remain broadly stable in 2021; projected to decline gradually to 55.4 percent by 2026. - Gross external financing needs: - Expected to be around 13 percent of GDP in 2021. - External debt financing share of gross financing needs: 81 percent in 2021; declining to 47 percent in 2026. Key drivers and historical context - External-debt-to-GDP dynamics: - Decline started in 2015; private sector deleveraging 2010-2015 halted; public sector deleveraging 2016-2018. - COVID-19 caused a reversal in 2020 with external-debt-to-GDP rising to 70.9. - Contribution of macro variables (selected table highlights preserved exactly): - Baseline: External debt: 72.4 (2014), 79.3 (2015), 76.4 (2016), 68.8 (2017), 66.1 (2018), 65.5 (2019), 70.9 (2020), 70.6 (2021), 68.0 (2022), 64.8 (2023), 60.9 (2024), 58.1 (2025), 55.4 (2026). - Change in external debt: 2.0 (2014), 7.0 (2015), -2.9 (2016), -7.6 (2017), -2.7 (2018), -0.6 (2019), 5.4 (2020), -0.3 (2021), -2.6 (2022), -3.1 (2023), -4.0 (2024), -2.8 (2025), -2.7 (2026). - Identified external debt-creating flows (4+8+9): 0.9 (2014), 15.2 (2015), -4.2 (2016), -6.9 (2017), -11.2 (2018), -1.7 (2019), -3.9 (2020), -4.8 (2021), -4.2 (2022), -4.1 (2023), -3.5 (2024), -3.2 (2025), -3.2 (2026). - Current account deficit, excluding interest payments: 3.3 (2014), 0.9 (2015), 0.3 (2016), 3.1 (2017), 3.3 (2018), 5.5 (2019), 2.8 (2020), 3.7 (2021), 4.0 (2022), 4.1 (2023), 4.5 (2024), 4.5 (2025), 4.6 (2026). - Exports (percent of GDP): 40.7 (2014), 44.0 (2015), 47.3 (2016), 49.3 (2017), 49.3 (2018), 50.8 (2019), 47.8 (2020), 52.6 (2021), 53.9 (2022), 54.7 (2023), 55.8 (2024), 56.3 (2025), 57.1 (2026). - Imports (percent of GDP): 51.0, 52.2, 53.3, 57.0, 58.9, 60.8, 56.7, 61.5, 62.5, 63.0, 63.5, 64.2, 64.9 (2014–2026 sequence as presented). - Net non-debt creating capital inflows: -3.5 (2014), -4.9 (2015), -5.1 (2016), -6.1 (2017), -7.3 (2018), -7.5 (2019), -6.3 (2020), -6.2 (2021), -6.2 (2022), -6.1 (2023), -6.1 (2024), -6.0 (2025), -6.0 (2026). - Automatic debt dynamics (contribution): 1.1 (2014), 19.2 (2015), 0.6 (2016), -3.9 (2017), -7.2 (2018), 0.3 (2019), -0.4 (2020), -2.3 (2021), -2.0 (2022), -2.0 (2023), -1.8 (2024), -1.7 (2025), -1.8 (2026). - Contribution from nominal interest rate: 2.2, 2.7, 2.6, 2.1, 1.6, 1.4, 1.4, 1.4, 1.0, 0.8, 0.6, 0.5, 0.4 (2014–2026). - Contribution from real GDP growth: -2.0, 1.4, -2.6, -1.5, -2.7, -2.8, 0.6, -3.7, -2.9, -2.9, -2.4, -2.3, -2.2 (2014–2026). - Residual, incl. change in gross foreign assets: 1.1, -8.2, 1.3, -0.7, 8.5, 1.1, 9.2, 4.6, 1.5, 0.9, -0.5, 0.4, 0.5 (2014–2026). - External debt-to-exports ratio (in percent): 177.7, 180.3, 161.7, 139.7, 133.9, 128.9, 148.4, 134.3, 126.1, 118.5, 109.1, 103.1, 97.1 (2014–2026). - Gross external financing need (in billions of US dollars): 7.2, 5.7, 5.6, 7.7, 8.1, 8.4, 8.9, 8.0, 8.6, 8.7, 9.5, 8.2, 8.3 (2014–2026). - Gross external financing need (in percent of GDP): 15.4, 14.3, 13.8, 17.3, 15.9, 16.3, 16.8, 10-Year, 10-Year, 13.1, 13.0, 12.2, 12.5, 10.1, 9.6 (table shows ten-year historical references and scenarios). Narrative drivers and projections - Economic activity: contracted by -1.0 percent in 2020; growth expected to recover and peak at 6 percent in 2021; converge to 4 percent by 2023. - Current account: narrowed to -4.3 percent of GDP in 2020 (from -6.9 percent in 2019); projected to increase to -5.1 percent in 2021 and stabilize around -5 percent thereafter. - Net FDI inflows: declined to 6.2 percent of GDP in 2020; expected to remain broadly around this level until 2026. - External financing composition: mostly FDI, and bilateral and infrastructure project loans. Vulnerabilities and sensitivity - Real exchange rate depreciation sensitivity: - A 30 percent real depreciation of the dinar in 2020 would: cause external debt-to-GDP ratio to exceed 100 percent in 2022 and stabilize at 83 percent by 2026 (scenario reported). - Mitigating factors: large share of multilateral and institutional creditors; long average maturity of debt; prevalent fixed interest rate structure. - Debt structure as of end-2020: - About 82 percent long term debt: 45 percent public sector; 37 percent private sector. - About 18 percent short term debt (remaining maturity basis): 4 percent public sector; 14 percent private sector. - Creditor split: about 40 percent official creditors; 60 percent private creditors. - Eurobonds: account for 15 percent of total external debt. - Banks and other financial institutions: account for 44 percent of total external debt. - Local currency debt held by nonresidents: remained below 5 percent of GDP. Policy recommendations and priorities - Continue prudent fiscal policies to maintain external and public debt sustainability. - Further enhance structural reforms to boost competitiveness: - Raise productivity and higher value-added investment to facilitate convergence and resilience to shocks, including potential exchange rate depreciation shocks. - After the COVID-19 crisis, return to the strong fiscal performance of 2019 and prior years, completing the fiscal-structural agenda implemented under successive Fund-supported programs. ### External debt bound tests and additional scenario insights (Annex VII figures) - Individual shocks are modeled as permanent one-half standard deviation shocks; combined scenarios and historical-average scenarios are also presented. - Selected scenario outcomes (figures): - Interest rate shock: Baseline 55; Scenario 56 (figure box values). - Historical scenario: Historical 77; Baseline 55. - Combined shock: Baseline 55; Combined 60. - Real depreciation shock (one-time 30 percent real depreciation in 2021): Baseline 55; Scenario 83. - Non-interest current account shock: Baseline 55; CA shock 61. - Growth shock: Baseline 55; Growth shock 58. - Figure annotations (selected averages shown in boxes): - Baseline average projections and scenario average projections reported for variables such as growth, current account, and interest rates (examples in figures: Baseline: 1.1; Scenario: 1.3; Historical: 2.9 for a variable; Baseline: 4.2; Scenario: 3.1; Historical: 1.8 for growth; Baseline: -4.3; Scenario: -5.6; Historical: -3.7 for current account as presented). *Source: IMF staff.* ### 7. To mitigate the impact of the COVID-19 crisis, we deployed a large fiscal package in ### 1srbea2021002 - 7. To mitigate the impact of the COVID-19 crisis, we deployed a large fiscal package in ### Fiscal response in 2020 - Total cost of adopted fiscal measures amounted to about 9 percent of GDP in 2020. - Measures included: - increased healthcare spending; - deferment of corporate income taxes, labor taxes and social security contributions for private companies; - wage subsidies; - a one-off payment to pensioners; - new loans to MSMEs from the Development Fund; - universal cash transfers. - State guarantee scheme for bank loans to SMEs: - loans of up to EUR 2 billion; - maximum cost to the budget of EUR 480 million. - Fiscal outcomes: - fiscal deficit reached 8.1 percent of GDP in 2020; - public debt remained below 60 percent of GDP. ### New support measures announced in early 2021 (estimated cost ~2.5 percent of GDP) - Overview: new measures with an estimated total cost of about 2.5 percent of GDP to support business and households. - Main components (amounts as presented): - Wage subsidies, including payment of ½ of minimum wages for all enterprenuers and employees in SMEs and large companies for three months (RSD 69.8 billion); - Additional payments for employees in travel, hospitality and art (RSD 4.4 billion); - Support for transportation sector (RSD 2.6 billion) and city hotels (RSD 1.3 billion); - A universal cash transfers of EUR 60 to each citizen over 18 years old, paid in two installments of EUR 30 each—in May and November (RSD 31.2 billion); - A one-off payment of EUR 50 to all pensioners in September (RSD 10 billion); - A cash transfer of EUR 60 to all pensioners in May and November (RSD 12 billion); - A one-off financial assistance of EUR 60 to all the unemployed, paid in June (RSD 4.3 billion); - A one-off payment of EUR 25 to all vaccinated citizens (RSD 9 billion). - State-guarantee schemes: - expanding existing state guaranteed bank loans to SMEs by EUR 500 million (1 percent of GDP); - setting up a new EUR 500 million scheme for vulnerable companies. ### 2021 fiscal stance and projections - 2020 outturns reiterated: - general government deficit reached 8.1 percent of GDP in 2020; - public debt 58.2 percent of GDP in 2020. - 2021 projections (after revised budget adoption): - general government deficit is projected at 6.9 percent of GDP (compared to 3 percent of GDP in the original 2021 budget). - Sources of upward revision: - cost of the new support measures (about 2.5 percent of GDP); - higher planned public investment (about 1.8 percent of GDP); - additional current spending (mostly related to the health sector); - upward revision of public revenues (about 1 percent of GDP) (these revenue increases are outweighed by the spending revisions). - Public debt is projected to reach close to 60 percent of GDP by end-2021. ### Medium-term fiscal strategy and discipline - Commitment to narrow fiscal deficit in 2022 and adopt a new fiscal rule effective in 2023, with a small overall deficit as a ceiling (see paragraph 13). - Objective to reduce public debt to less than 45 percent percent of GDP over the medium term. - Policy orientation: - maintain high levels of capital spending while containing current spending; - ensure a gradual reduction of the public sector wage bill as a percent of GDP. ### Fiscal risk management and contingency measures - Will closely monitor revenue and expenditure risks related to the pandemic, particularly risks from troubled SOEs, local governments, and state-guaranteed loans. - Commitments and targets: - maintain adequate liquidity buffers; - will not accumulate public sector external debt payment arrears (continuous target); - will refrain from accumulating domestic payment arrears (quantitative target). - Monitoring of spending through a ceiling on current primary spending of the Republican budget, excluding capital spending and interest payments (quantitative target). ### Transparency and accountability for COVID-19 spending - Specific commitments: - continue to ensure that new procurement procedures are followed in line with the procurement regime effective in July 2020; - ensure execution of this spending is officially accounted for through regular budget execution reports; - subject all spending to regular ex-post control mechanisms and publish ex-post audits by the State Audit Institution. - Any financial support to public enterprises will be delivered transparently and channeled through the government budget. ### Medium-term fiscal rules and pension rule (paragraph 13) - Adopt a new deficit-based fiscal rule anchored on public debt (end-June 2022 reform target). The new system will: - offer a more transparent and credible operational annual ceiling for the overall general government fiscal deficit (at a low level and depending on the level of public debt (including restitution bonds) compared with preset debt thresholds); - improve accountability; - retain a strong role of the Fiscal Council. - Collaboration with the IMF to define key elements: debt thresholds, escape clauses, possible cyclical adjustment, correction mechanisms, and accountability framework. - New fiscal rule effective with the 2023 budget. - Pension policy: - continue to index pensions based on the formula that became effective in 2020 and refrain from any ad-hoc pension increases; - pension indexation will automatically be suspended should the pension bill exceed 11 percent of GDP. ### Tax administration modernization and revenue measures - Reform supported by IMF technical assistance and the Tax Administration Diagnostic Assessment Tool review. - New Transformation Program Action Plan (TPAP) for 2021-25 to create a modern tax administration using electronic business processes, improved taxpayer services, and a risk-based approach to compliance. - Explore options to reduce the fiscal burden on labor and improve progressivity and efficiency of the personal income tax system. - World Bank-supported Tax Administration Modernization Project focusing on: - improvement of the Serbian Tax Administration (STA) organization and operations, including business process re-engineering; - ICT system and record management modernization, including implementation of an e-fiscalization system management. - Procurement and capacity actions: - tender for procuring a new commercial-off-the shelf-system (COTS) to be launched upon adoption of the new business model, expected to be completed by the end of 2021; - external consultant hired to review STA’s existing business processes to guide re-engineering; - aim to reduce staffing shortages in the STA, including by enhancing hiring processes. - VAT refunds: - STA will continue to process VAT refunds within the deadlines prescribed by the law (15/45 days for exporters and others, respectively), but will strive to refund VAT earlier to low-risk taxpayers. - Law on Origin of Assets: - setting up, with Fund TA support, a dedicated unit to analyze noncompliance of high net worth individuals and start implementing a response strategy. ### Public employment framework and wage system reform - Public employment framework reforms: - replace existing framework with a new system based on personnel planning for all public sector entities over the medium term; - during 2021-23 transition, Employment Commission will continue to allow hiring within institutions’ budget limits with improvements; - December 2020 amendments: institutions can replace up to 70 percent of staff leaving or retiring without Commission approval; additional hiring beyond 70 percent requires Commission approval; - overall limit: total number of permanent staff in the public sector cannot exceed the end-December 2020 level by more than 1 percent; - publication requirement: decisions on hiring approvals must be published on institutions’ websites. - phase out hiring approvals through the Employment Commission once the new permanent system is effective. - new electronic public employment registry for the Public Administration developed; pilot for the Ministry of Finance effective; full system by 2023. - Public wage system reform: - 2016 Law on the Public Sector Employees Wage System establishes equal pay for equal work across public sector; - secondary legislation approved in December 2017 for local governments, public agencies, and public services (health, education, culture, and social protection); - new Law on Salaries of Civil Servants and General Service Employees and amendments to the job catalogue delayed and expected to be adopted during 2021; - aim to implement new wage system and make it effective as of 2022; - will assess adequacy of wage coefficients both before introduction and while in force to ensure consistency with market conditions. ### Public investment management (PIM) - Commitments: - continue to include all project loans of the general government in the budget; - developed a single project pipeline to cover all ongoing and future projects; - continue to develop working practices in MOF’s PIM Unit to operationalize the new system and ensure strong central oversight and compliance with PIM requirements; - build human resource capacity within the PIM Unit and strengthen coordination and information flows within MOF departments. - Public Investment Management System (PIMIS) with World Bank support: - developing an integrated database of public investment projects; - procurement underway, aiming to have first modules operational in 2021 and the full system in 2022. ### Public financial management (PFM) strengthening - New PFM reform program for 2021-25 and related action plan to be adopted in June (2021), incorporating PEFA findings and inputs from SIGMA/OECD and the European Commission. - Key measures include: - improving capacities for budget planning and PIM; - efficient collection and management of budget funds; - enhancing budget discipline and more efficient management of EU funds; - improving implementation of the public sector internal control system; - strengthening regulation and application of international accounting standards for the public sector; - strengthening external scrutiny of public funds. - Fiscal Risks Monitoring Department (FRMD) enhancements: - finalize and adopt a methodology to properly monitor and manage fiscal risks, prepared with World Bank support, covering fiscal risks from (i) SOEs; (ii) local governments; (iii) litigation; and (iv) natural disasters; - adopt by-laws required for implementation (end-September 2021 reform target) describing roles and responsibilities, main fiscal risk reports, and their use in decision making. - Developed, with IMF TA support, a methodology for managing fiscal risks associated with state-guarantee schemes designed in response to COVID-19. - Procurement and state aid: - new Law on Public Procurement effective July 2020; ensure all procurement transactions use the e-procurement portal; - strengthen state aid controls and transparency, building on 2019 legislation; appointed an independent and well-resourced State Aid Commission; - publish inventory of state aid schemes, including corresponding amounts, and adopt secondary legislation to make Law on State Aid Control effective and aligned with EU acquis (end-September 2021 reform target); - adopt action plan to align state aid with EU rules, including tax expenditures. - Medium-term budgeting and state guarantees: - continue strict adherence to budget calendar and transparency; published 2019 financial statement in December 2020; publish fiscal strategy for 2022 in June 2021; - strictly limit issuance of state guarantees: no new state guarantees for liquidity support to SOEs, or for any company in the portfolio of the former Privatization Agency; Government will refrain from issuing any implicit state guarantees. - Arrears management: - continue publication of monthly reporting of overdue receivables to Srbijagas and EPS of their top-20 debtors on the companies’ websites; - promptly resolve any new domestic arrears and address underlying factors. ### Inflation developments and expectations - Inflation: - During 2021Q1, headline inflation hovered around the lower bound of the inflation target range; - moved to 2.8 percent in April on the back of vegetable and oil price increases and last year’s low base. - Core inflation has remained below 2 percent. - Inflation expectations: - one-year ahead inflation expectations of the financial and corporate sectors at around 2 percent. ### Monetary policy and liquidity support during COVID-19 - Expansionary monetary stance maintained to support lending and economic activity. - Policy measures: - implemented four key policy rate cuts in 2020, reducing it from 2.25 percent to 1 percent; - narrowed the interest rate corridor from ±1.25pp to ±0.9pp relative to the key policy rate. - Liquidity operations and market support: - provided liquidity (both in dinars and euros) to banks through additional and regular EUR/RSD swap auctions and repo purchase auctions at lowered, preferential rates; - conducted outright purchases of dinar government securities at market rates amounting to RSD 97 billion, helping ensure stability on the government bond market. - Corporate bonds in central bank operations: - In May 2020, local-currency denominated corporate bonds became eligible for OMOs and as collateral for daily liquidity loans and short-term liquidity from the NBS (eligibility limited to bonds issued before end-2020, original maturity up to 10 years, and companies with at least “acceptable solvency” rating); - Total NBS purchases of corporate bonds capped at RSD 55 billion, with limits to purchase of individual bonds (up to 70 percent of a bond’s issuance) and companies (up to RSD 11 billion of bonds of a single issuer). - Since September 2020, purchased RSD 27.6 billion of corporate bonds from domestic banks in secondary markets. - Measures to incentivize dinar lending under state guarantee scheme: - In July 2020, increased remuneration by 0.50 percentage points relative to the standard remuneration rate on allocated required reserves in dinars (which equals 0.10 percent) to eligible banks for approving dinar loans under state guarantee schemes at interest rates at least 0.50 percentage points lower than the ceiling interest rate envisaged by the first and second schemes (1M BELIBOR+2.5 percentage points and 1M/3M BELIBOR +2.75 percentage points, respectively). - ECB repo line: - Extended by 9 months the repo line arrangement with the ECB to address possible euro liquidity needs of Serbian financial institutions; - Under this repo line, the ECB provides euro liquidity (up to EUR 1 billion) to the NBS in exchange for adequate euro-denominated collateral; - Maximum maturity of each drawing is three months; - Repo line will remain in place until end-March 2022. ### Monetary policy framework - The current inflation targeting framework remains appropriate. - Commitment to keep inflation within the tolerance band: 3 percent ±1½ percentage points. - Inflation developments will be monitored via a consultation clause with consultation bands set around the central projection. *Republic of Serbia — International Monetary Fund (excerpts from the provided content unit)* ### 21. We aim to maintain relative stability of the exchange rate, especially during the crisis ### 21. We aim to maintain relative stability of the exchange rate, especially during the crisis ### Exchange rate policy and reserves - Foreign exchange interventions will continue to be used to smooth excessive short-term exchange rate volatility, while considering the implications for financial sector and price stability. - In the context of heightened uncertainty due to the pandemic, we intervened in the FX market with a net sale of EUR 1.45 billion during 2020, with additional net sales of EUR 50 million in January-April 2021. - We assess the current level of gross international reserves as adequate and comfortable for precautionary purposes. - During the period of the PCI we will not, without IMF approval, impose or intensify restrictions on the making of payments and transfers for current international transactions, nor introduce or modify any multiple currency practices or conclude any bilateral payment agreements that are inconsistent with Article VIII of the IMF’s Articles of Agreement. Moreover, we will not impose or intensify import restrictions for balance of payments reasons. ### Dinarization strategy and progress - Promoting dinarization remains an important medium-term objective. The dinarization strategy adopted in 2012—and updated in 2018—is based on three pillars: (i) maintaining overall macroeconomic stability; (ii) creating favorable conditions for developing the dinar bond market; and (iii) promoting hedging instruments. - Measures in place to foster dinarization include higher reserve requirements on FX deposits, mandatory down-payment ratios for FX loans, and systemic risk buffers. - Communication priorities: public communication on risks of unhedged FX borrowing, prudent management of FX risks, availability of hedging instruments, and benefits of dinar savings. - Based on a survey of banks’ exposures to foreign currency borrowers, in December 2019 a set of prudential measures related to banks’ capital adequacy and risk management was adopted to support dinar lending; introduction was postponed in 2020 due to the COVID-19 crisis. - In March 2021, deposit and credit dinarization reached 38.3 percent and 37.9 percent, respectively. - Public debt in local currency reached 30.5 percent at the central government level (30.2 percent at the general government level), in March. ### Developing local currency debt and hedging markets - Once COVID-19 uncertainty dissipates, consideration will be given to additional measures to (i) further develop local and foreign currency derivative markets, and (ii) encourage prudent pricing of credit risks of unhedged foreign currency borrowing. - Public debt management actions: - Aim to make possible the settlement of Serbian government securities through Euroclear effective in 2022 to expand the investor base, reduce transaction costs, and improve liquidity; due diligence finalized and external consultants hired to align IT systems and legal practices with Euroclear standards. - Plan to establish a primary dealer system and develop an adequate supervisory framework; implementation delayed by the COVID-19 crisis. - Necessary changes to the Public Debt Law and the Law on Capital Market will be approved; a working group has been established and a pilot will be effective in 2022. ### Financial sector measures in response to the pandemic - Moratoria and debtor support: - Initial 3-month moratorium (April-June 2020) relived debtors of repayment obligations under loan and lease agreements. - Followed by a 2-month moratorium covering August and September (and July obligations not settled). - In December 2020, measures envisaging rescheduling and refinancing of bank loans and a six-month grace period with extension of repayment terms were adopted; period for borrowers to request rescheduling expired in end-April 2021. - Mortgage LTV: In June 2020, the loan-to-value (LTV) cap for first-time home buyers’ mortgage loans in foreign currency was relaxed from 80 percent to 90 percent. - Capital buffers: - Countercyclical buffer rate (CCyB) kept at 0 percent, given persisting global uncertainty and credit-to-GDP level below long-term trend. - Systemic risk buffer kept at 3 percent of total FX and FX-indexed loans to corporates and households to limit risks from high financial euroization. ### Financial sector regulatory strengthening and safety nets - Continued alignment of regulatory and supervisory frameworks with international standards and EU requirements; harmonization with EU Acquis while considering Serbian market specificities. - Deposit insurance and crisis management: - Law on Deposit Insurance amended in October 2019 to introduce risk-based premia, establish backstop funding, and modify computation basis from eligible to insured deposits, with target fund deadline extended to 2030. - DIA adopted a methodology for implementation of a risk-based premium assessment model in October 2020; aim to introduce risk-based premiums in 2022. - DIA temporary adjustment: limit to invest in foreign currency government securities (up to 25 percent) was temporarily lifted; DIA increased holdings of government securities from 25 percent to about 47 percent of its foreign currency investment portfolio by end-September 2020; reverted to previous exposure limit in May 2021, 12 months after expiration of the state of emergency. ### Non-performing loans (NPLs) and resolution strategy - NPL level and monitoring: - As of end-February, the NPL ratio was at 3.8 percent. - COVID-19 may negatively impact NPLs, but impact should be mitigated by comprehensive support measures deployed by the NBS and the government. - Continued close monitoring of NPL trends, including after expiration of repayment moratoriums and fiscal support measures. - NPL resolution strategy: - Focus on preventing accumulation of new NPLs, improving bankruptcy frameworks, and broadening scope to include AOFI, the Development Fund (DF), and bad assets managed by the DIA on behalf of the State and bankruptcy estates of banks in liquidation. - DIA portfolio resolution: first phase completed in June 2019; sale of the second, larger portfolio (of EUR 1.8 billion) completed in April 2021. - By end-July a time-bound plan to resolve residual DIA assets will be developed with external consultants. ### State-owned financial institutions and SOE reforms - State-owned financial institutions: - Privatization of Komercijalna Bank was completed in December 2020. - Continued implementation of new strategy for Banka Poštanska Štedionica (BPS) focusing on retail reorientation, internal organization, corporate governance, risk management, and IT enhancement. - April 2020 amendments to government conclusion on BPS to allow lending to medium-size companies via state guarantee scheme, eliminate loan-size limit for private enterprises, allow lending to municipalities/local governments (MOF consent required for loans over RSD 20 million), and abolish cap on exposure to SOEs. - Monitoring risks related to new lending under the state guarantee scheme remains a priority. - New Business Plan for 2020–22 adopted in June 2020 to reflect asset growth, COVID-19 circumstances, and amended government conclusion on BPS. - Preparations for procurement of a new core banking system ongoing; procurement to be undertaken after merger between BPS and MTS bank, expected to be completed by end-June 2021. - Plan for the future of Srpska Banka to be prepared by end-September 2021. - Development Fund and AOFI have implemented supervisory boards’ decisions recognizing losses, restricted exposures to SOEs, enhanced risk management, and worked to resolve impaired assets. - Large public utilities and strategic companies: - Elektroprivreda Srbije (EPS): - Legal status change to a joint stock company targeted by end-November 2022. - Complete valuation of company’s properties and assets by end-2021. - Srbijagas: operational unbundling to be completed in line with Government Conclusion; reliance on government support for servicing past debt has been phased out and no further support is committed. - Remaining strategic companies: - Petrohemija: privatization advisor hired; privatization tender intended to be launched by end-June with completion by end-2021. - MSK: options for strategic investments or partnerships to be explored. - Lasta: privatization process delayed by the pandemic; new timeline to be set by end-June 2021. - Resavica mines: time-bound action plan developed with World Bank to close four unviable mines and develop voluntary social and labor optimization programs; sufficient budget resources will be ensured to support Resavica and prevent further arrears to EPS. - Privatization and bankruptcy outcomes: - By March 2021, more than 310 companies entered bankruptcy, and 68 were privatized since end-2014. - About 36,000 employees from 357 companies have received severance payments. - 76 companies with nearly 28,000 employees remain. - State-ownership policy for SOEs: - New ownership and governance strategy adopted on April 1, 2021, consistent with OECD Guidelines on Corporate Governance of State-Owned Enterprises. - The SOP identifies ownership rationales and objectives, criteria for classification of SOEs, framework for setting objectives and targets and monitoring achievement, and reviews legal and regulatory framework for SOE corporate governance. ### Capital markets, development finance, and AML/CFT - Capital markets and development finance: - Serbia’s capital markets remain underdeveloped with limited stock-market activity, nascent domestic bond market volumes, and a very small corporate bond market; private equity and venture capital are negligible. - Diagnostic assessment with World Bank support produced a strategic outline of 35 action items under four pillars: (i) regulatory reforms; (ii) institution building; (iii) focused stimuli; and (iv) outreach and education. - External consultants under an EBRD project have prioritized action items with view to finalize and adopt a new strategy and time-bound action plan (end-September 2021 reform target). - Working group for Development Finance formed and a strategic document and action plan delayed due to COVID-19, expected to be completed by September-2021; strategy will not include creation of a development bank. - AML/CFT strengthening: - Serbia is largely or fully compliant with FATF standards but will further enhance AML/CFT frameworks. - Regular reporting under the EU agenda and MONEYVAL continued; most recent MONEYVAL report submitted by end-March 2021 requested upgrade on four FATF Recommendations rated partially compliant. - Implementation of action plan for 2020-24 National Strategy Against Money Laundering and the Financing of Terrorism; coordinators for each of four strategic specific objectives appointed in March 2021. - New national risk-assessment update to be completed in 2021; Working Group established in March 2021. - Regulatory alignment: Securities Commission aligned regulations in June 2020; MOF passed an amended Rulebook on the Methodology for Complying with the AML/CFT Law and a Rulebook on licensing examination for compliance officers. - December 2020: new Law on Digital Assets and amendments to the AML/CFT law adopted, updating the legal framework concerning digital assets in full compliance with FATF updated Recommendation 15. - Prosecution progress: several persons convicted for money laundering in 2020. ### Social protection, green growth, and structural reforms - Social protection: - Development of a Social Cards Registry envisaging a single, centralized, and electronic record with up-to-date socio-economic data to improve consistency and efficiency of social protection programs. - Plans to enhance coverage of social protection system to protect households against poverty using the new database. - Green growth agenda: - Adoption of the Law on Climate Change provides the basis for a low-carbon development strategy and consistency across national strategies and plans affecting greenhouse gas emissions. - Law on Amendments and Supplements to the Law on Energy envisages adoption of a National Energy and Climate Plan (NECP) currently under preparation. - Prioritizing green investments, including in renewable energy; will consider carbon pricing mechanisms once overarching goals and principles are designed. - Government plans issuance of the first green bonds in Serbia to finance green projects. - Structural reforms and grey economy: - Continued reforms to improve investment climate, strengthen rule of law, fight corruption, reduce informality, and enhance corporate governance of public and state-owned enterprises. - Action Plan on National Program for Countering the Grey Economy implemented with priorities: inspection system improvements, tax administration modernization, incentives for voluntary compliance, and business environment improvements. - E-inspection system to enhance coordination across inspections with a horizontal e-platform facilitating risk-based inspection oversight. - Expansion of fiscalization scope, training of STA employees, and data processing/analysis from fiscal cash registers. - Expansion of the Law on Simplified Seasonal Employment in Specific Industries to additional sectors (including domestic work, construction, tourism and catering). *Source: 1srbea2021002 - “21. We aim to maintain relative stability of the exchange rate, especially during the crisis”* ### 41. The next step will be to adopt a time-bound action plan to implement this SOE ### 41. The next step will be to adopt a time-bound action plan to implement this SOE ### SOE strategy implementation — action plan (end-June 2021 reform target) - Key actions to be included in the time-bound action plan: - Develop the KPI framework for SOEs, including general, sectoral and tailored KPIs. - Establish a process for monitoring the implementation of SOEs’ strategy and business programs by the Ministry of Economy. - Establish composition and tenure guidelines for SOEs’ supervisory boards/board of directors. ### Governance, oversight, and centralized information (end-December 2021 reform target) - Planned actions: - Develop a centralized and updated database with a registry of all SOEs and their assets. - Establish mechanisms and criteria for reviewing and approving key decisions of SOEs by the Ministry of Economy, to serve as a basis for future amendments to the legislative framework. ### Legal and policy framework (end-December 2022 reform target) - Required legislative and policy steps: - Adopt a new law on ownership management for state-owned enterprises. - Adopt a dividend policy aligned with long-run views of the key PEs and SOEs. - Make efforts to promptly resolve the excessive reliance on acting directors in state-owned companies. ### National statistics — improvements and data sharing - Progress and commitments: - In December 2020, the Ministry of Finance started to submit monthly fiscal accounts to the European Department of the IMF using the templates in line with the GFSM 2014 framework, developed with the assistance of IMF TA. - In January 2021, the Serbian Statistical Agency (SORS) submitted cash budgetary general government data per GFSM 2014 to the IMF GFS Yearbook publication, for the period 2013-2019. This provides revenue and expenditure data for the central and local government budgetary units and social security funds. - SORS developed automation procedures to compile data on a unit-by-unit-basis or by groups of units, supporting ongoing (high frequency) data compilation and submission. - Commitment to comprehensive, timely, and automatic data sharing across relevant compiling agencies (including MOF, SORS and NBS) for statistical purposes. - NBS and SORS will coordinate to compile and disseminate annual cash financing data consistent with the GFSM 2014 compliant revenue and expenditure data now published. - Coordinated and phased work will continue to migrate all annual fiscal statistics to an accrual (or modified cash) basis. - In accordance with international dissemination best practices: - MOF will compile and SORS will publish on the national summary data page (NSDP) monthly GFSM 2014 compliant fiscal accounts covering the central and local government, social security funds, and the consolidated general government. - MOF/SORS will publish quarterly debt data covering central and general government debt, and government guaranteed debt by creditor (end-September 2021 reform target). - SORS will continue reporting data per GFSM 2014 to the IMF GFS Yearbook publication. *Source: 1srbea2021002 - 41. The next step will be to adopt a time-bound action plan to implement this SOE* ### 43. Progress in the implementation of the policies under this program will be monitored ### 43. Progress in the implementation of the policies under this program will be monitored ### Monitoring framework and review schedule - Progress will be monitored through quantitative targets (QTs)—including an inflation consultation clause—continuous targets (CTs) and reform targets (RTs). - Definitions are provided in the attached Technical Memorandum of Understanding. - Review schedule: - First review: to be completed by October 1, 2021 - Second review: to be completed by April 1, 2022 - Third review: to be completed by October 1, 2022 - Fourth review: to be completed by April 1, 2023 - Fifth review: to be completed by October 1, 2023 ### Quantitative and continuous program targets (Table 1a / Table 1b) I. Quantitative Targets (QT) - 1 Ceiling on the general government fiscal deficit 2/ 3/ (in billions of dinars) - end-Jun. 2021: 175.5 - end-Sep. 2021: 263.3 - end-Dec. 2021: 412.2 - end-Mar. 2022: 84.6 - end-Jun. 2022: 131.6 - 2 Ceiling on current primary expenditure of the Serbian Republican Budget excluding capital expenditure and interest payments (in billions of dinars) 2/ - end-Jun. 2021: 621.5 - end-Sep. 2021: 916.0 - end-Dec. 2021: 1256.0 - end-Mar. 2022: 260.3 - end-Jun. 2022: 534.0 - 3 Ceiling on accumulation of domestic payment arrears by the consolidated general government except local governments, the Development Fund, and AOFI (in billions of dinars) 4/ - end-Jun. 2021: 1.0 - end-Sep. 2021: 1.0 - end-Dec. 2021: 1.0 - end-Mar. 2022: 1.0 - end-Jun. 2022: 1.0 II. Continuous Targets - 4 Ceiling on accumulation of external debt payment arrears by General Government, Development Fund, and AOFI (in billions of euros) - end-Jun. 2021: 0.0 - end-Sep. 2021: 0.0 - end-Dec. 2021: 0.0 - end-Mar. 2022: 0.0 - end-Jun. 2022: 0.0 III. Inflation consultation band (quarterly) 5/ - End of period inflation, center point 6/ - end-Jun. 2021: 3.0 - end-Sep. 2021: 3.0 - end-Dec. 2021: 3.0 - end-Mar. 2022: 3.0 - end-Jun. 2022: 2.5 - Upper band limit (1.5 percent above center point) - end-Jun. 2021: 4.5 - end-Sep. 2021: 4.5 - end-Dec. 2021: 4.5 - end-Mar. 2022: 4.5 - end-Jun. 2022: 4.0 - Lower band limit (1.5 percent below center point) - end-Jun. 2021: 1.5 - end-Sep. 2021: 1.5 - end-Dec. 2021: 1.5 - end-Mar. 2022: 1.5 - end-Jun. 2022: 1.0 Notes and definitions (as presented) - 1/ As defined in the Program Statement and the Technical Memorandum of Understanding. - 2/ Cumulative since the beginning of a calendar year. - 3/ Refers to the fiscal balance on a cash basis, including the amortization of called guarantees. - 4/ Cumulative change since the start of the year. - 5/ Staff level consultation is required upon breach of the band limits. - 6/ Defined as the change over 12 months of the end-of-period consumer price index, as measured and published by the Serbian Statistics Office. - 7/ Indicative targets are not monitored as part of program conditionality. ### Reform targets (Table 2) — objectives and target dates Fiscal - 1 Publish monthly GFSM 2014 compliant fiscal accounts on the national data summary page (NSDP), covering central government, local government, social security funds, and the consolidated general government, and quarterly debt data covering central and general government debt, and government guaranteed debt by creditor. - Target Date: End-September 2021 - 2 Publish an inventory of state aid schemes, including the corresponding amounts; and adopt all necessary secondary legislation for making the Law on State Aid Control effective and aligned with the relevant EU acquis. - Target Date: End-September 2021 - 3 Adopt a methodology to monitor fiscal risks, covering fiscal risks stemming from (i) SOEs; (ii) local governments; (iii) litigation; and (iv) natural disasters; and adopt the by-laws required for an effective implementation of the new methodology and frameworks. - Target Date: End-September 2021 - 4 In consultation with Fund staff, adopt the new deficit-based fiscal rule anchored on public debt. - Target Date: End-June 2022 Other - 5 Adopt the new strategy for capital market development and a related time-bound action plan to implement it. - Target Date: End-September 2021 - 6 Adopt a time-bound action plan to implement the new ownership and governance strategy for SOEs. - Target Date: End-June 2021 - 7 Develop a centralized and updated database with a registry of all SOEs and their assets; and establish mechanisms and criteria for reviewing and approving key decisions of SOEs by the Ministry of Economy. - Target Date: End-December 2021 - 8 Adopt a new law on ownership management for SOEs. - Target Date: End-December 2022 - 9 Change the legal status of Elektroprivreda Srbije (EPS) to a joint stock company. - Target Date: End-November 2022 ### Technical Memorandum of Understanding — key definitions and measurement rules Fiscal conditionality and scope - General government fiscal deficit defined as difference between total general government expenditure (irrespective of financing source) — including expenditure financed from foreign project loans, payments of called guarantees, cost of bank resolution and recapitalization, cost of debt takeover if debt was not previously guaranteed, repayments of debt takeover if debt was previously guaranteed, and payment of arrears — and total general government revenue (including grants). - Consolidated general government comprises: Serbian Republican government (without indirect budget beneficiaries), local governments, the Pension Fund, the Health Fund, the Military Health Fund, the National Agency for Employment, the Roads of Serbia Company (JP Putevi Srbije) and any of its subsidiaries, and the company Corridors of Serbia. Any new extra budgetary fund or subsidiary established over the duration of the program would be consolidated into the general government. - Privatization receipts are classified as a financial transaction and are recorded “below the line” in the General Government fiscal accounts. Current primary expenditure of the Republican budget (without indirect budget beneficiaries) - Includes wages, subsidies, goods and services, transfers to local governments and social security funds, social benefits from the budget, other current expenditure, net lending, payments of called guarantees, cost of bank resolution and recapitalization, cost of debt takeover if debt was not previously guaranteed, repayments of debt takeovers if debt was previously guaranteed, and payment of arrears (irrespective of the way they are recorded in the budget law). - Excludes capital spending and interest payments. Domestic arrears (program definition) - Defined as the belated settlement of a debtor’s liability which is due under the obligation (contract) for more than 60 days, or the creditor’s refusal to receive a settlement duly offered by the debtor. - The quantitative target covers change in total domestic arrears of (i) all consolidated general government entities as defined above, except local governments; (ii) the Development Fund; and (iii) AOFI. - Arrears to be covered include outstanding payments on wages and pensions; social security contributions; obligations to banks and other private companies and suppliers; as well as arrears to other government bodies. - Measured as change in the stock of domestic arrears relative to the stock at December 31, 2020, which stood at RSD 2.6 billion. Debt issued at a premium (program definition) - Refers to proceeds accruing to the government that are recorded as revenue when the government issues debt at a premium (e.g., when a bond with an above-market coupon is reopened ahead of a coupon payment). Ceiling on External Debt Service Arrears - External debt-service arrears defined as overdue debt service arising in respect of obligations incurred directly or guaranteed by the consolidated general government, the Export Credit and Insurance Agency (AOFI), and the Development Fund, except on debt subject to rescheduling or restructuring. - Program requires that no new external arrears be accumulated at any time under the arrangement on public sector or public sector guaranteed debts. - Authorities committed to continuing negotiations with creditors to settle all remaining official external external debt-service arrears. - Accounting of external arrears by creditor (if any), with detailed explanations, will be transmitted on a monthly basis, within four weeks after the end of each month. Inflation Consultation Mechanism - Inflation defined as the change over 12 months of the end-of-period consumer price index (CPI), base index (2006=100), as measured and published by the Serbian Statistics Office (SORS). - Where the official press release differs from the index calculation, the index calculation will be used. - Breaching the inflation consultation band limits at the end of a quarter triggers discussions with IMF staff on reasons and proposed policy response. ### Adjustors to targets - Quarterly ceilings on the general government fiscal deficit will be adjusted downward (upward) to the extent that cumulative non-tax revenues of the General Government from dividends, debt recovery receipts, debt issuance premiums, and concession and PPP receipts recorded above-the-line exceed (fall short of) programmed levels. - IMF Statistics Department will determine proper statistical treatment of any concession or PPP transaction signed during the IMF program. Programmed cumulative revenues (In billions of dinars) - Programmed cumulative dividends: 17.1 at end-Jun. 2021; 17.1 at end-Sep. 2021; 17.1 at end-Dec. 2021; 17.1 at end-Mar. 2022; 17.1 at end-Jun. 2022 - Programmed cumulative debt recovery receipts: 2.5 at end-Jun. 2021; 2.5 at end-Sep. 2021; 4 at end-Dec. 2021; 4 at end-Mar. 2022; 4 at end-Jun. 2022 - Programmed cumulative debt issuance at a premium: 0 at end-Jun. 2021; 0 at end-Sep. 2021; 6 at end-Dec. 2021; 6 at end-Mar. 2022; 6 at end-Jun. 2022 - Programmed concession and PPP receipts recorded above the line: 0 at all listed dates - Quarterly ceilings on the primary current expenditure of the Republican budget will be adjusted upward (downward) to the extent that: - (i) cumulative earmarked grant receipts exceed (fall short of) programmed levels, and - (ii) cumulative proceeds from small-scale disposal of assets recorded as non-tax revenues exceed programmed levels up to a cumulative annual amount of 2 billion dinars in each year. - Grants for the adjustor are defined as noncompulsory current or capital transfers received by the Government of Serbia, without any expectation of repayment, from either another government or an international organization, including the EU. Programmed cumulative receipts from earmarked grants and small-scale asset disposal (In billions of dinars) - Programmed cumulative ear-marked grants receipts: (end-Jun. 2021) 9.3; (end-Sep. 2021) 13.9; (end-Dec. 2021) 17.6; (end-Mar. 2022) 5.5; (end-Jun. 2022) 9.3 - Programmed cumulative receipts from small-scale disposal of assets: 0 at all listed dates ### Reporting obligations and data submissions - General government revenue data and the Treasury cash position table: submitted weekly. - Stock of spending arrears (> 60 days past due) as defined in ¶6: submitted 45 days after the end of each quarter; and the stock as reported in the MOF e-invoice system submitted within 14 calendar days after the end of each month. - General government comprehensive fiscal data (including social security funds): submitted within 35 days of the end of each month. - Gross issuance of new guarantees by the Republican budget for project and corporate restructuring loans: submitted within 35 days of the end of each month. - Cumulative below-the-line lending by the Republican budget: submitted within 35 days of the end of each month. - Borrowing by the Development Fund and AOFI: submitted within four weeks of the end of each month. - New short-term external debt (maturities less than one year) contracted or guaranteed by the general government, the Development Fund, and AOFI: submitted within four weeks of the end of each month. - Receivables of the top 20 debtors to Srbijagas and EPS: submitted in agreed templates within 30 calendar days after the end of each month and published on the company websites. Data reporting for quantitative targets — reporting agencies, types, and timing - Statistical Office and NBS: CPI inflation — Within four weeks of the end of the month - Ministry of Finance: Fiscal deficit of the consolidated general government — Within 35 days of the end of the month - Ministry of Finance: Current primary expenditure of the Republican budget excluding capital expenditure and interest payments — Within 35 days of the end of the month - Ministry of Finance: External debt payment arrears by general government, Development Fund and AOFI — Within four weeks of the end of the month - Ministry of Finance: Gross accumulation of domestic payment arrears by the general government (without local government, the Development Fund, and AOFI) — Within 45 days of the end of the quarter - Ministry of Finance: Earmarked grants and receipts from small-scale disposal of assets — Within four weeks of the end of the quarter *Source: Technical Memorandum of Understanding and Program Tables, Staff Report for the 2021 Article IV Consultation and Request for a 30-month Policy Coordination Instrument.* ### 2024. The planned adjustment would revert the crisis-induced increase in public debt, from 60 ### 1srbea2021002 - 2024. The planned adjustment would revert the crisis-induced increase in public debt, from 60 ### Fiscal adjustment and public debt - The planned adjustment would revert the crisis-induced increase in public debt, from 60 percent this year to about 55 percent in 2024. - The fiscal adjustment will be achieved primarily by reducing the share of current expenditures in GDP. - Policy measures to reduce current expenditures include: - Moderating the growth of public wages and pensions. - Cutting subsidies and other current expenditures. - Public investments will be maintained at a relatively high level of about 6 percent of GDP. - The authorities do not plan to increase taxes. - If revenues overperform targets, the authorities plan to reduce the tax burden on labor. ### Pensions and indexation rule - In 2020 the authorities adopted pension indexation in line with the Swiss formula, linking pension growth to inflation and average wage growth. - The Swiss formula led to countercyclical pension increases in 2020 and 2021, as the formula tracks economic activity with certain delay. - As a result of the pension indexation rule, the growth of public pensions is projected to be below the growth of nominal GDP going forward, allowing for a gradual decline of pension expenses towards the targeted share of GDP of about 10 percent. - The pension rule includes a cap for annual public pension expenses at 11 percent of GDP. ### Fiscal rules, accountability, and PIM reforms - To ensure stability and sustainability of public finances over the long run, the authorities plan to introduce a new set of fiscal rules. - Serbia previously adopted legislation defining fiscal rules in 2010, but those were inefficient in containing higher deficits and debt surges. - In coordination with the Fund, the authorities will design and adopt a new deficit-based fiscal rule and implement it with the 2023 budget. - The new fiscal rule will improve accountability and retain the central role of the Fiscal Council. - With World Bank support, the authorities are developing a public investment management information system (PIMIS) to support full operationalization of the PIM reforms initiated under the 2018 PCI. - These reforms aim to streamline and further improve the efficiency of public investments. ### Monetary policy and financial sector - The monetary policy stance remains accommodative, consistent with the negative output gap, low inflationary pressures, and the need to support the recovery. - Since the inception of the crisis, the NBS cut the reference rate from 2.25 to 1 percent. - In 2020, inflation remained close to the lower bound of the inflation corridor and inched closer towards the target of 3 percent in April and May. - Inflation expectations of the corporate and banking sector remain well-anchored below the inflation target. - The financial sector remains well capitalized, liquid, and profitable. - NPLs remained at a historical low of 3.9 percent in March, although impairment provisioning has increased recently. - Credit activity, buoyed by recent policy measures, remains strong, growing at about 7 percent in March. - A recent survey of the banking sector points to an easing of credit standards, which will further support the healthy provision of credit to the economy. - Advancing the dinarization agenda remains the authorities' key policy objective over the medium-term. - Credit dinarization reached 37.9 percent in March, fostered by macroprudential and monetary measures, including: - Lower funding costs. - Higher reserve requirements on FX deposits. - Higher mandatory down payment ratios for FX loans. ### Structural policies - Serbia adopted an ownership and governance strategy for SOE to clarify the role of state ownership and set the basis for improving governance and transparency. - The strategy clarifies issues related to state ownership, governance, international standards and best practices, and will guide the authorities’ further SOE reforms. - The strategy will support ongoing efforts to better monitor and control fiscal risks. - In November, Serbia signed a Declaration on the Green Agenda for the Western Balkans. - The Green Agenda primarily focuses on decarbonization and reducing pollution, and also on establishing a circular economy, sustainable agriculture, and preserving biodiversity, marking an important milestone towards greening the economy. *Source: 1srbea2021002 - 2024. The planned adjustment would revert the crisis-induced increase in public debt, from 60* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1srbea2021002.pdf_