IMF sees positive macroeconomic trends in Serbia
An International Monetary Fund (IMF) mission, led by James Roaf, visited Belgrade during February 18-26, 2016, to initiate discussions on the fourth review under Serbia's precautionary Stand-By Arrangement (SBA) with the IMF.
At the conclusion of the visit, Mr. Roaf said, "The IMF mission had constructive discussions with the authorities on policies needed to complete the fourth review under the SBA. While considerable progress has been made in implementing the program, due to the general elections we agreed with the authorities to continue the discussions with a follow-up visit once a new government has taken office." "Performance under Serbia's economic program has been strong.
All quantitative performance targets for endDecember were met, most by large margins. At 3.7 percent of GDP, the fiscal deficit in 2015 was the lowest since 2008. And with confidence improving and interest rates declining, Serbia returned to positive growth, helped by a strong pick-up in foreign investment. Inflation has remained low and stable, which is the most effective way to protect the real value of wages and pensions. We expect these positive macroeconomic trends to continue in 2016. Our growth projection is unchanged at 1.75 percent, while average inflation is revised down to 1.7 percent, mainly due to further declines in oil prices.
"However, looking forward Serbia still faces important challenges. Public debt remains high, highlighting the importance of achieving the program's structural fiscal adjustment targets of about 0.75 percent of GDP in each of 2016 and 2017. The government's ambitious but necessary rightsizing plan is running behind schedule, and would need to be accelerated and implemented fully.
This reform is important not only to reduce the deficit, but also to improve the effectiveness of central and local governments, which is consistent with the authorities' goal of a smaller, more efficient, and better-paid public sector to deliver better services (such as health and education) to citizens. The authorities reconfirmed their commitment to ensuring that the ceilings on employee numbers defined in the December 2015 decision are implemented and verified by the time of completion of the review, and to move ahead in planning the next stage of rightsizing based on in-depth functional reviews conducted with the World Bank.
"The restructuring of state-owned enterprises, including utilities, remain a difficult challenge. These reforms are vital to improve Serbia's competiveness, growth and employment. 2016 is a critical year for reform of EPS, Srbijagas and the railways, and a new government will need to move rapidly to implement restructuring plans for these entities.
Good progress has been made in resolving some of the strategic state-owned enterprises covered by the program, but a number of difficult cases remain. These need to be addressed in ways that minimize fiscal risks while taking account of social and environmental priorities. Ultimately, the only way to protect jobs in these enterprises is to deeply restructure them so as to ensure their long-term commercial viability, while providing needed social and labor market assistance to redundant employees.
"Given the low inflation outlook and the improved fiscal position, the mission supports the NBS's cautiously accommodative monetary policy stance. The inflation targeting framework serves Serbia well, and the mission considers that greater day-to-day flexibility in the exchange rate should be accommodated to the extent this does not jeopardize inflation targeting and financial stability.
"The financial sector reform agenda continues to progress well, in particular with the finalization and publication of the special diagnostic studies of bank asset quality, which confirmed the financial soundness of all systemic banks. The main focus of the financial sector agenda for 2016 should be the reform of state-owned financial institutions to improve transparency and competition and reduce fiscal risk, along with implementation of the NPL resolution strategy. "The mission team is grateful for the authorities' hospitality and close cooperation."