IMF Lending Case Study: Serbia

Source details

Publication: IMF Lending Case Study: Serbia
Period covered: 2015–18 Stand-By Arrangement
Date: May 2019
Objective: Assess the effectiveness of the 2015 three-year precautionary Stand-By Arrangement in addressing fiscal imbalances, structural challenges, and financial-sector risks.

Key concerns motivating the arrangement:
- declining revenues, despite tax rate hikes;
- rising mandatory spending, especially public wage and pension bills;
- expanding state aid to ailing state-owned enterprises, usually in the form of direct subsidies and guarantees for borrowing;
- the cost of resolving ailing public banks.

Initial program envisaged:
- consolidation plans of more than 4½ percent of GDP focused on durable expenditure measures;
- emphasis on curbing mandatory spending and reducing state transfers to state-owned enterprises because tax rates had been raised during the two years before the program;
- efforts to improve tax collection efficiency and broaden the tax base, while taking a cautious approach to assumed fiscal gains in the macroeconomic framework.
Early reforms:
- authorities had initiated reforms of state-owned enterprises prior to arrangement approval, which fed into the program.

Original versus eventual composition:
- initial expectation: a 7 percent of GDP adjustment in primary current spending and revenues to decline by more than 2 percent of GDP;
- over time: composition adjusted, with both revenues and primary current spending contributing equally to a fiscal adjustment of 6 percent of GDP.
Drivers of outperformance:
- positive growth surprises, partly on the back of strengthened confidence and financial sector intermediation, supported revenue overperformance;
- Value-added tax, corporate income tax, and excise taxes played an increasingly important role.
Expenditure dynamics:
- current expenditures (particularly wage and pension expenses and state transfers) were contained;
- capital spending was broadly protected relative to programmed projections;
- capacity constraints prevented full execution of additional public investment enabled by revenue overperformance.

Social spending context:
- expenditure on social programs was roughly comparable with that of peers.
Program support for social protection:
- program supported improvements in the existing social safety net;
- although there was no explicit conditionality related to social protection, the program supported amendments to the Law on Social Protection aimed at improving the effectiveness and targeting of cash welfare allowances;
- in light of concerns about social impacts (in particular related to electricity tariff increases), the program pointed to the World Bank’s assistance in lessening such impact by improving the efficiency of social spending and safety nets.

Completion and outcomes:
- the program was successfully completed;
- Serbia succeeded in addressing macroeconomic imbalances and restoring confidence and growth;
- fiscal sustainability was restored, and the external position was realigned with fundamentals.
Success factors:
- conservative initial growth forecasts;
- strong ownership and flexible implementation of durable fiscal adjustment, which largely protected capital spending.
Remaining challenges:
- progress in implementing structural and institutional reforms was mixed;
- the Stand-By Arrangement was succeeded by a program under the Policy Coordination Instrument to support the remaining structural reform agenda.