Via IMF (Den Internationale Valutafond)

Serbia: Concluding Statement of the Mission for the 2019 Article IV Consultation and the Second Review under the Policy Coordination Instrument (PCI)

May 21, 2019

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

  • Growth is robust, public debt is declining, inflation is low and stable,
    and many key reforms have been implemented.
  • Available fiscal space should be used for capital spending and follow
    rigorous selection and appraisal procedures to contribute the greatest
    boost to sustained growth.
  • Key requirements to support medium-term growth include building a
    workforce that can fully participate in the modern economy, improving the
    business environment, and strengthening corporate governance of state-owned

We enjoyed

constructive discussions on the 2019 Article IV Consultation and
reached staff-level agreement on policies needed to complete the second
review under the PCI.

The program remains broadly on-track with all end-March 2019 quantitative
targets met. Most reform targets have been implemented, although some with
delays. The agreement is subject to approval by IMF Management and
Executive Board. Consideration by the Executive Board is tentatively
scheduled for mid-July.

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It will be critical to maintain a balanced policy mix to promote a
sustainable expansion

Macroeconomic stability has continued to take hold since the 2017
Article IV Consultation.

After Serbia suffered a drought in 2017, growth in 2018 rebounded to 4.3
percent—its fastest pace in 10 years. Fiscal discipline has taken root,
with the general government budget recording a surplus for two consecutive
years and public debt falling by about 15 percent of GDP since the
beginning of 2017. At the same time, unemployment has continued to decline,
and employment has risen steadily, with informal employment making up a
smaller share. Inflation has been kept low and the financial sector is
stable, with the level of banks’ non-performing loans as a share in total
loans reaching 5.5 percent at end-March 2019, the lowest level since 2008.

near-term outlook remains positive.
Growth in 2019 is projected at 3.5 percent, with a pick-up in growth
expected during the second half of the year due to strong foreign direct
investment (FDI), continued public investment, and assumed recovery in
trading partner countries. Inflation will move within the lower half of the
inflation target band, while the current account deficit as a share of GDP
is expected to widen modestly and remain fully covered by FDI.

The recent relaxation of fiscal policy, with a deficit of about ½
percent of GDP targeted in 2019 and over the medium term, remains

This provides some fiscal space, which should be reserved for capital
investment, while reducing public debt further. The recent increases in
investment spending are welcome, but public investments should be based on
rigorous selection and appraisal procedures to make sure that they
contribute the greatest boost to potential growth. At the same time,
current spending should remain contained.

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The National Bank of Serbia’s accommodative monetary policy stance has
been appropriate.

It has supported domestic demand and bank credit growth in recent years,
while inflation remains under control. With macroeconomic stability firmly
entrenched, over the medium term a gradual move towards greater exchange
rate flexibility, that preserves financial stability, could help to further
develop the exchange rate market and promote dinarization.

Risks to the near-term growth outlook are tilted to the downside.

The slowdown in the euro area starting in the second half of
2018—especially in Serbia’s most important trade partners—has already
affected economic activity and may continue to do so because of lagged
effects. Rising protectionism could further hamper growth through its
impact on global trade. On the domestic side, strong wage growth is
expected to support consumption, but domestic demand may turn out weaker if
anticipated investments are not realized. Maintaining strong domestic
policies will be essential to strengthen the resilience of Serbia’s
economy. If downside risks to growth materialize, there is room for
automatic fiscal stabilizers to act and monetary policy could play a
supportive role, provided that inflation remains low.

Even more important than near-term growth is ensuring that the
structural drivers of growth over the medium term are solid

Ensuring opportunities for skilled workers within Serbia will be
critical to limit ‘brain drain’.

Education and training opportunities to prepare students and workers for
the modern economy will be key as well as regulations that address business

Improving the private investment climate through the better provision
of public services and reduction of the grey economy should remain
government priorities.

Actions by the state to reduce its footprint can help improve competition
and in this regard the authorities’ resolve to privatize Komercijalna Bank
is welcome. The tax administration’s (STA) split between core and non-core
activities will support the streamlining and modernization of tax
administration. Greater use of electronic fiscal services can help curb the
grey economy. The recently-agreed action plan approved by the Coordination
Body for Countering the Grey Economy is also a positive step in this

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Fiscal achievements need to be better anchored to preserve hard-won
gains, while also supporting private sector growth.

Plans to reintroduce a fiscal rule anchored on debt can help cement
credibility. The full implementation of the wage system reform and
reintroduction of pension indexation can also be important tools to
underpin fiscal discipline. Tax policy measures to strengthen
competitiveness, raise growth, and boost employment should aim at reducing
the tax burden on labor, particularly on low wage earners.

Improving governance frameworks can bring positive economic

Strong governance is critical, including anti-corruption efforts and
providing legal certainty.

Substantial progress has been achieved on AML/CFT deficiencies, but other
anti-corruption efforts need to be strengthened. The recent legislation on
converting CHF mortgage contracts, with budget support, should not set a
precedent for resolution of conflicts within the private sector.

Improving State Owned Enterprise (SOE) governance and efficiency can
raise economic growth.

Good strides to resolve some strategic enterprises have been made and the
overall SOE sector is now profitable, but more can be done. Weak corporate
governance—particularly in the areas of ownership policy and fiscal
oversight—can constrain growth and increase risks of corruption. In the
short-run, the authorities should publish a comprehensive list of SOEs,
adopt an ownership policy document, appoint permanent professional
management, and expand capacity to analyze fiscal risks from SOEs.

The mission team is grateful for the authorities’ hospitality, candid
conversations, and close cooperation.

IMF Communications Department

PRESS OFFICER: Gediminas Vilkas

Phone: +1 202 623-7100Email: