Press Release No. 04/228

Press Release: IMF Mission Statement on Discussions in Serbia and Montenegro

October 27, 2004

An International Monetary Fund (IMF) mission, led by Ms. Piritta Sorsa, and the authorities of Serbia and Montenegro reached understandings in principle on an economic program for 2004-2005, supported by the IMF under the Extended Arrangement for 2002-05. The Executive Board of the IMF is expected to discuss the fourth review of the arrangement in December. The mission thanked the authorities for their warm hospitality and excellent collaboration during the discussions.

During the last weeks, discussions between IMF staff and the authorities of Serbia and Montenegro focused on policies needed to reduce the high current account deficit, projected to reach 13 percent of GDP in 2004, improve debt dynamics, and slow down inflation to maintain macroeconomic stability and sustainable growth. GDP growth is now projected to reach 4-5 percent in 2005, while inflation after peaking at 12-13 percent at end-2004 is expected to fall back to single digits by end-2005. The current account deficit would decline to 12 percent of GDP in 2005, reflecting tighter macroeconomic policies and high world oil prices.

The macroeconomic targets will be supported by prudent fiscal and monetary policies to rein the rapid increase in domestic consumption that was fuelled by wage growth beyond productivity and a rise in credit activity. Further, they will be supported by an acceleration of structural reforms and tight incomes policies to increase exports, investment, and competitiveness. Implementation of the agreed measures should help ensure a gradual decline in the debt burden over the medium-term and strengthen the ability of Serbia and Montenegro to service its external obligations.

On fiscal policy, the re-balanced budget for 2004 is—in addition to the already tighter fiscal and monetary policies since mid-year—a further bold step toward reducing public consumption in 2004, inflation, and the external deficit. Fiscal prudence is to continue in 2005. On revenues, the overall tax burden is projected to decline in 2005 to boost savings and investment. The shift to taxing consumption instead of income will be continued with the introduction of the value-added tax (VAT) in January and the removal of small taxes. Measures will be taken to improve compliance and tax payer services. The size of the government will be reduced by lowering the level and improving efficiency of current expenditures. This would help make room over time for a more flexible fiscal policy, higher investment and debt service payments, and more efficient social safety nets to support the most vulnerable in society.

A tight monetary policy will support fiscal policy in reducing domestic consumption, in particular, by tightening conditions for consumer credit. Building on good advances so far, bank and insurance supervision will continue to be strengthened. Progress with bank privatization is also encouraging and new tenders will be launched in the near future.

To speed up transition and improve competitiveness, structural reforms related to privatization, debt resolution, and enterprise restructuring will be accelerated. The recent efforts to speed up tenders, auctions, and share sales will continue, and the new Bankruptcy Law will be made operational in early 2005. Measures to improve efficiency and productivity of public enterprises will also be reinforced.