Press Release No. <a name="P16_75"></a>05/246

Mr. Harald Hirschhofer, Resident Representative of the International Monetary Fund (IMF) in Serbia and Montenegro, made the following statement on October 31, 2005 in Belgrade:

"An IMF mission led by Ms. Piritta Sorsa visited Belgrade and Podgorica from October 20-31 and made good progress in discussions under the sixth and final review of the Extended Arrangement. Discussions will continue in the forthcoming weeks on a number of issues, including the composition of fiscal spending, monetary policy measures, and wage bill growth in public enterprises in Serbia. Further meetings are also required with the Montenegrin government to firm up understandings about the privatization agenda envisioned for 2006.

"In Serbia, discussions were held against the background of broadly favorable economic developments. Growth projections for 2005 and 2006 were revised upward to 4.8 percent and 5.0 percent, respectively, amid improving export performance, strong domestic demand and growing investment activity by local and foreign companies. The current account deficit is improving, but remains high at about 10.6 percent of GDP and inflation is too high. External debt dynamics remain of concern with external debt amounting to about 60 percent of GDP.

"The key policy challenges for Serbia remain to reduce the current account deficit and inflation by strengthening competitiveness and investment, while constraining consumption. The mission made good progress on discussing the following policies to achieve that:

• Next year's public sector surplus will rise to 2.3 percent of GDP, but the structure of spending is still under discussion. This is to be supported by prudent wage increases in the public sector.

• The government prepared an impressive set of measures to reduce permanent, non-discretionary public spending by one percentage point of GDP next year, and to improve its quality. These still need to be anchored in supporting legal actions along with the 2006 budget. The measures include improving the quality and efficiency of the healthcare system, reforming the army and adjusting its operations to the requirements outlined by the currently finalized Strategic Defense Review, further reducing subsidies to inefficient enterprises, and ending transfers to the Development Fund.

• Monetary policy and prudential regulations will be tightened to address the fast growth in lending, in particular consumer lending, and its risks. It is of key importance that the planned new Banking Law will be passed by Parliament. Discussions continue on the exact measures to be undertaken.

• The exchange rate policy remains appropriate. Competitiveness can be improved by restructuring and privatizing state enterprises, greater competition in the economy, improving the investment climate, and increasing the efficiency of public administration.

• Structural reforms need to continue. The work of the Privatization Agency to prepare auctions and tenders of socially owned enterprises has been proceeding well. Its agenda now needs to be broadened towards privatizing spun-off units from the large public enterprises. The government is making efforts to overcome remaining obstacles. The strong interest by top international firms to participate in the tender for the NIS privatization advisor reflects the importance of this industry, its regional opportunities, and the excellent privatization prospects. Measures to continue the restructuring in public enterprises are still being discussed."

For further information please contact the Office of the Resident Representative in Belgrade, tel. +381 11 30 27 369, or consult the IMF website:

www.imf.org/external/country/SCG/index.htm.