Glass factory in Paracin, Serbia. To foster job creation, the Serbian government has already taken steps to amend the labor law to remove disincentives to hiring (photo: Ivan Milutinovic/Reuters/Corbis)
STAND-BY ARRANGEMENT
While it has weathered the financial crisis relatively well, Serbia faces a number of significant challenges: sluggish growth, serious fiscal imbalances, incomplete reforms, and natural disasters—an extreme winter and a drought in 2012, and devastating floods in 2014.
A new coalition government, which was appointed in April 2014, reaffirmed Serbia’s path to EU accession, and even before signing a new €1.2 billion Stand-By Arrangement with the IMF, already implemented some very difficult reforms that are needed to restore macroeconomic stability and achieve sustainable growth.
After the new program was approved by the Executive Board, IMF Survey interviewed Zuzana Murgasova, mission chief, and Daehaeng Kim, resident representative for Serbia, about the country’s prospects going forward.
IMF Survey: What are the main objectives of the program?
Murgasova: Three main pillars of the program are: restoring the sustainability of public finances; increase the stability and resilience of the financial sector; and implement comprehensive structural reforms that will boost job creation and bring sustained high growth back.
First, it envisages fiscal adjustments to stabilize public debt within the program period. The consolidation is largely based on curbing mandatory spending and reducing state aid to state-owned enterprises (SOEs). Actually, some of the major measures, related to pensions and public sector wages, have already been introduced in 2014 or are included in the 2015 budget, highlighting how committed the Serbian authorities are to the program.
Tightening on the fiscal side will allow for some relaxation on the monetary side. With the fiscal consolidation, the central bank will be able to reduce interest rates, fostering credit for the economy and the private sector to grow.
Second, the program aims to strengthen the financial sector. Serbian banks have weathered the crisis relatively well. However, the volume of bad debt (non-performing loans) has increased a lot. This is a significant challenge, but will be essential to get credit flowing again. When banks are clogged with too much debt that is not being paid, they can’t provide new loans to the economy. The Serbian government is committed to designing and implementing a comprehensive strategy to deal with this problem. Also, reducing the use of foreign currencies (particularly euro) and increase the dinarization of the economy is very important.
The third leg of the program is to continue with structural reforms. They are essential to enhance Serbia’s growth potential, and austerity is self-defeating without growth. There are three broad priorities to be implemented over the medium term: job creation; improvement of the business environment and competitiveness; and resolution and reform of SOEs.
IMF Survey: If Serbia is not in a crisis, and won’t draw the money, why does it need economic support from the IMF now?
Kim: Serbia has significant internal vulnerabilities, and its main European partners are going through a period of sluggish growth. This program is a kind of insurance policy against potential financial needs.
However, the broader goals of this program are to prevent future crises and to build the foundations of a healthy economy. These aspects are more important than the financial support. The IMF will provide advice to address both domestic and external imbalances and to improve the investment climate to boost job creation and growth, through its quarterly reviews and technical assistance in many areas.
Last, but not the least, an IMF-supported program is a “seal of approval” for the markets of a country’s economic policies, which would help attract investment and create more jobs than when the credibility is in question.
IMF Survey: The program is proposing “strong fiscal consolidation” based on cutting spending at a time when austerity is being criticized all over Europe. Why is it being proposed again in Serbia? Is there the risk of triggering a recession, like in other countries?
Murgasova: We have ample evidence that fiscal sustainability is essential for macroeconomic stability, sustained growth, and job creation, which Serbia needs the most. Serbia’s public debt has risen too fast and to very high levels. Bringing down the debt-to-GDP ratio is a priority. So strong actions are needed right from the start.
The impact from fiscal tightening on growth should be partly offset by easier monetary policy. Previously Serbia had the opposite situation: high interest rates had to compensate for a too loose fiscal policy. This stifled credit and private sector growth.
Also, the program is not only about cutting public spending. It acts on several fronts: allow interest rates to come down, unclog the financial system, so banks can lend more, and make the economy more efficient by carrying out important structural reforms.
IMF Survey: Serbia signed up for two programs with the IMF since the beginning of the financial crisis (in 2009 and 2011). The last one was not completed. What will be different this time?
Kim: Broader social and political support on the need for comprehensive reforms have been built in recent years, as policy makers and the general public came to understand that without deeper reforms, return of sustained high growth will be unlikely.
The authorities have a strong ownership of, and are very committed to the proposed reforms, which are supported by the parliamentary majority, and have already demonstrated commitment to reforms by introducing a number of important measures last year. Examples include amendments to the Labor Law, a comprehensive pension reform, and the launch of privatization. There reforms are clearly very difficult both politically and socially, yet they were introduced well before the start of the IMF program.
Another element that is providing a strong impetus for reforms is the EU accession process, in particular, the formal negotiations that were opened a year ago.
The IMF and other international institutions, like the World Bank and the European Bank for Reconstruction and Development, have worked closely together in many aspects of this program. This collaborative effort and the involvement of other stakeholders increase the support for needed reforms, and increase the chances of success.
