IMF Staff Completes a Virtual Review Mission to Serbia

IMF News, July 3, 2020

Source details

Press Release No. 20/253; mission led by Jan Kees Martijn.
IMF mission held virtual meetings with the Serbian authorities during June 24 – July 3, 2020.
Staff-level agreement reached on policies needed to complete the fourth review under the Policy Coordination Instrument (PCI).
Agreement is subject to approval by IMF Management and Executive Board; consideration by the Board is tentatively scheduled for the second half of August 2020.
The mission is grateful for the authorities’ close cooperation.

The COVID-19 pandemic has had a significant adverse impact on Serbia’s economic activity.
Real GDP is projected to contract by 3 percent in 2020, compared to an increase by 4.2 percent in 2019, and is expected to rebound to 6 percent growth in 2021.
The shock is affecting the economy through lower external demand, weaker foreign investment and remittances, domestic supply constraints, and disruptions in regional and global supply chains.
Given the highly uncertain economic outlook, the mission recommends careful contingency planning.

Quantitative targets have been reset to reflect the major changes in the fiscal outlook for 2020.
The fiscal package includes increased healthcare spending, tax deferrals, wage subsidies, universal cash transfers, and a state guarantee scheme for bank loans to SMEs.
The implementation of fiscal measures, together with the decline in revenues, will raise the fiscal deficit in 2020 to more than 7 percent of GDP, compared with 0.5 percent of GDP in the initial budget.
Given the projected economic rebound and the temporary nature of the fiscal measures, it should be possible to reduce the fiscal deficit to about 2 percent of GDP next year.
Public debt, which was declining steadily prior to the pandemic, is now expected to increase in 2020 while staying below 60 percent of GDP, but should resume a clear downward trajectory in 2021.
To make room for higher public investment and in light of budget risks:
- Increases in public sector wages and pensions should be limited in 2021.
- Ad-hoc pension increases, or one-off payments should be avoided.
- Limiting wages and pension increases should ensure that the public sector wage bill as a share of GDP returns to more sustainable levels after increasing in the last two years.
There is a need for scaling up public investment to support the economic recovery and boost potential growth.
The economic shock is amplifying fiscal risks stemming from troubled SOEs and state-guaranteed loans.

The National Bank of Serbia (NBS) contributed to the response by cutting the key policy rate and injecting liquidity in the banking system.
NBS introduced a three-month moratorium on bank loan repayments and further measures to preserve monetary and financial stability.

Implementation of structural reforms has faced delays due to the pandemic.
Priority reforms identified:
- Strengthen tax administration.
- Reform public sector wage and employment systems.
- Improve corporate governance of public enterprises.
- Develop Serbia’s capital market.
A thorough assessment of electricity tariffs is warranted to ensure full-cost recovery.
The mission welcomes progress towards completing the privatization of Komercijalna and encourages further efforts to privatize Petrohemija.

Continue focusing policies on:
- Supporting the economy through the crisis.
- Preserving macroeconomic and financial stability.
- Managing risks adequately.
- Protecting vulnerable groups.
Reset and adhere to revised quantitative targets reflecting the changed 2020 fiscal outlook.
Limit public sector wage and pension increases in 2021 to create fiscal space for public investment.
Avoid ad-hoc pension increases or one-off payments.
Proceed with structural reforms and privatizations to reduce fiscal risks and boost potential growth.

IMF press release, July 3, 2020.

Press Release-End of Mission AIV UFR
- Press Release-End of Mission AIV UFR (Markdown version)
- Press Release-End of Mission AIV UFR (PDF)