IMF Executive Board Completes Second Review Under the Policy Coordination Instrument and Modification of Targets for the Republic of Serbia

IMF News, June 27, 2022

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The Executive Board concluded the Second Review Under the Policy Coordination Instrument (PCI) for the Republic of Serbia.
The PCI was approved on June 18, 2021, and aims to support recovery from the pandemic, maintain macroeconomic stability, anchor the medium-term fiscal policy framework, and advance structural reforms to deliver more inclusive and sustainable growth.
The war in Ukraine, an energy crisis, and high inflation have disrupted the recovery from the COVID-19 pandemic.

Real GDP:
- 2021: 7.4 percent
- 2022 projection: 3.5 percent
- 2023 projection: 4.0 percent
Drivers of the 2022 slowdown: high inflation dampening consumer demand, curtailed trade with Russia, and lower external demand.
Inflation:
- Inflation increased to 10.4 percent in May 2022.
- Core inflation was 6.3 percent.
Monetary policy response:
- The monetary policy rate has been increased three times since April (2022) in response to continued high inflation.
Risks to the near-term outlook are elevated and mostly to the downside: a potentially prolonged war in Ukraine, further pressures on energy and commodity prices, supply chain disruptions, lower external demand, and continued production shortfalls in the energy sector.
The IMF staff note that provided global inflation moderates, inflation should return to within the NBS target band over the medium term.

Energy shock in 2021-22 winter:
- Shortfalls in domestic electricity production coincided with rising global energy prices.
- Increased total energy costs by about 2 percent of GDP.
Authorities’ policy response:
- Actions to preserve financial stability, help companies navigate the international sanctions regime and supply chain disruptions, mitigate pass-through of high global commodity prices through regulation, and provide financing for energy imports.
- Started to secure energy supply and address medium-term reform needs in the energy sector.
Policy recommendations and priorities:
- Reforms of the energy sector are urgently needed to restore reliable supply and ensure cost recovery.
- A strategy for the state-owned power company Elektroprivreda Srbije (EPS) and timely adoption of the National Climate and Energy Plan will provide an essential framework for energy investments, particularly in renewable sources.
- Fiscal support provided in the past winter helped maintain energy supply; any further economic disruptions warranting support should take the form of targeted measures accommodated through spending reprioritization.

Fiscal stance and performance:
- The fiscal deficit target of 3 percent of GDP for 2022 remains appropriate and feasible, supported by strong revenue collection.
- Higher than budgeted tax revenue has covered new spending measures to date.
Fiscal aggregates (selected from Table 1):
- Revenue (percent of GDP): 2021: 43.6; 2022: 43.3; 2023: 41.7; 2024: 41.3
- Expenditure (percent of GDP): 2021: 42.2; 2022: 49.0; 2023: 48.5; 2024: 47.4
- Fiscal balance (percent of GDP): 2018: 0.6; 2019: -0.2; 2020: -8.0; 2021: -5.0; 2022: -4.1; 2023: -3.0; 2024: -1.5
- Primary fiscal balance (cash basis, percent of GDP): 2018: 2.8; 2019: 1.8; 2020: -6.0; 2021: -3.1; 2022: -2.4; 2023: -1.2; 2024: -1.3
- Structural primary fiscal balance (percent of GDP): 2018: 2.9; 2019: 1.5; 2020: -4.0; 2021: -3.4; 2022: -2.5; 2023: -1.7; 2024: -1.0
- Gross debt (percent of GDP): 2018: 54.4; 2019: 52.8; 2020: 57.9; 2021: 58.3; 2022: 57.2; 2023: 56.5; 2024: 55.1
Structural reforms and institutions:
- Structural reforms should continue to underpin medium-term growth.
- New fiscal rules expected to be launched with the 2023 budget will provide an important anchor for medium-term fiscal discipline.
- The planned primary dealer system will support capital market development.

External sector and reserves:
- Current account balance (percent of GDP): 2018: -4.8; 2019: -6.9; 2020: -4.4; 2021: -4.3; 2022: -6.1; 2023: -5.7
- Gross official reserves (in billions of euro): 2018: 11.3; 2019: 13.4; 2020: 17.1; 2021: 16.5; 2022: 18.0
- Reserves (in months of prospective imports) and percent of short-term debt, and percent of broad money (M2) are reported in Table 1 with multiple year observations.
External debt (percent of GDP): 2018: 66.1; 2019: 65.7; 2020: 70.3; 2021: 68.4; 2022: 71.3; 2023: 64.8; 2024: 66.2
Banking and monetary indicators (selected):
- Money (M1) growth rate: 2018: 20.1; 2019: 16.3; 2020: 36.3; 2021: 11.4; 2022: 14.5; 2023: 11.2; 2024: 8.6
- Broad money (M2) growth rate: 2018: 15.0; 2019: 8.8; 2020: 18.4; 2021: 10.6; 2022: 13.0; 2023: 8.4; 2024: 11.8
- Domestic credit to non-government (percent change, at constant exchange rates): 2018: 9.5; 2019: 12.0; 2020: 5.8; 2021: 9.9; 2022: 13.5; 2023: 7.5; 2024: (table continues)
The authorities acted swiftly to preserve financial stability amid shocks.

Per capita GDP (US$): 2018: 7,252; 2019: 7,397; 2020: 7,700; 2021: 9,012; 2022: 9,178; 2023: 9,940; 2024: 9,597
Real GDP per capita (percent change): 2018: 4.6; 2019: -0.4
Unemployment rate for working age population (15-64) is reported in the table (series includes 14.1, 11.6, 10.1 for earlier years).

Serbia has shown resilience during the Covid-19 pandemic, but faces new challenges from the war in Ukraine, high inflation, and the energy crisis.
Authorities’ policies have helped mitigate immediate impacts and preserved macro-financial stability, but the near-term outlook is subject to downside risks and high uncertainty.
The fiscal deficit target of 3 percent of GDP for 2022 is appropriate and feasible given strong revenue collection.
Any further support should be targeted and accommodated through spending reprioritization.
Urgent energy sector reforms, a strategy for EPS, and timely adoption of the National Climate and Energy Plan are essential.
Continued monetary policy tightening is appropriate to curb inflation expectations and help bring inflation back within the inflation band over the policy horizon.
Structural reforms and new fiscal rules will underpin medium-term growth and fiscal discipline.

Source: IMF Press Release No. 22/230, June 27, 2022.