Press Release No. <a name="P16_75"></a>04/207

An International Monetary Fund (IMF) mission led by Ms. Piritta Sorsa visited Belgrade and Podgorica during September 17-29 to hold discussions on the fourth review under the Extended Arrangement for 2002-05. The mission and the authorities have made good progress and will continue the discussions in the coming weeks.

The economy of both republics in 2004 so far is doing well, although the growing external imbalance is of concern. Growth in 2004 is likely to reach 6 percent, well beyond projections. The foreign reserves of the National Bank of Serbia remain at a comfortable level, and the recent agreement with the creditors of the London Club helped lower the country's debt/GDP ratio by about 7 percentage points. Structural reforms and privatization have also picked up recently, notably in Serbia with the passing of 17 important reform laws in July and renewed activity in privatization. However, the strong growth in real wages and credit has contributed to the increase in imports, especially of consumer goods, while exports remain low at less than half the level of imports, reflecting the slow pace of restructuring of the economy. As a result the current account deficit could reach 13 percent of GDP in 2004. While much of it is financed by grants and some foreign direct investment, the large share of debt-financing raises concern.

The discussions have focused on policies needed to deal with the high external deficit. To this end, it has been helpful that fiscal and monetary policies in Serbia were already tightened since mid-year to contain aggregate demand and limit inflation. The discussions of these past days focused on fiscal policy in 2004 and 2005, monetary policy and the high growth of consumer lending, and structural reforms to increase growth, particularly through exports.

Discussions with the Serbian and Montenegrin authorities on the necessary policies will continue in the coming weeks, building on the agreements reached in many areas, including the 2004 budget. The mission and the authorities have also substantially narrowed their differences on the 2005 budgetary policies, and will continue to discuss both these policies and structural measures further.