On August 30, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Serbia and completed the seventh review of Serbia’s economic performance under the Stand-By Arrangement (SBA).
Serbia’s economy has strengthened impressively since the adoption of the economic program supported by the SBA. Serbia was in a difficult macroeconomic situation prior to the start of the program in early 2015, with stagnant growth, an unsustainable fiscal position, and rising non-performing loans in banks. Two years later, macroeconomic performance has made a major turnaround. Economic growth is expected to reach 3 percent this year. The fiscal deficit should narrow to 1.1 percent of GDP—the lowest level since 2005—and public debt is heading down faster than projected. Contrary to expectations, the larger than planned fiscal tightening has been associated with increased growth, reflecting the confidence engendered by decisively tackling the public debt sustainability concerns. Moreover, unemployment is falling sharply, along with the level of banks’ non-performing loans, while inflation has been maintained at low levels.
Continued reform efforts are needed to address remaining vulnerabilities and structural weaknesses. Serbia has pursued a comprehensive reform agenda encompassing public enterprises and State Owned Enterprises (SOEs), public administration, the financial sector, and the business climate. Overall progress has been good. But there have been delays in some areas—notably in reforms of public administration, public services and SOEs. The economy is still overburdened by a large and inefficient public sector, with too little reliance on the productive private sector. The labor market is characterized by low participation rates, especially of women, and a high degree of informality. Future growth will thus depend on further improving the environment for private sector investment and employment growth. While Serbia’s ranking in business surveys has risen markedly, improvements are still needed in areas such as streamlining and modernizing tax administration, increasing transparency and predictability of public fees and charges, and ensuring a more efficient and independent judicial system.
Executive Board Assessment
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the significant economic improvement since the last Article IV consultation and achieving the key macroeconomic targets under the Fund-supported program, which has helped improve confidence, strengthen growth, and increase employment. Looking ahead, Directors considered that significant structural challenges and downside risks remain. They urged the authorities to solidify hard-won gains by continuing to build stronger institutions and making further ambitious progress on implementing the structural reform agenda, which are necessary to improve economic efficiency bolster private sector-led growth, and are essential aspects of the EU accession process.
Directors commended the strong revenue performance. While this has allowed for a smaller than envisaged contraction of expenditure, Directors stressed that containing non-discretionary current spending remains an important priority. This is necessary to ensure that debt will remain on a declining path, while creating fiscal space for needed capital spending and potentially for targeted reductions in tax burdens. Directors also urged that reforms in areas that have faced delays should be carried out expeditiously, including modernizing education, strengthening tax administration, and restructuring of state-owned enterprises and utilities.
Directors agreed that monetary policy has succeeded in keeping inflation under firm control. While noting that broad exchange rate stability has reinforced confidence and helped reduce euroization, they highlighted the need to allow for day-to-day exchange rate flexibility, consistent with the inflation-targeting regime.
Directors welcomed that financial sector reforms under the program have strengthened the resilience of the sector, helping to support future growth. They stressed that efforts to reduce NPLs need to continue, and that reforms of state-owned financial institutions need to be accelerated.
Directors recognized that Serbia’s business environment has strengthened, but considered that impediments to private investment and growth remain. Directors stressed the need to strengthen judicial processes, especially judicial independence and reducing delays in court decisions. They encouraged the authorities to strengthen labor force participation, particularly among women.
It is expected that the next Article IV consultation with the Republic of Serbia will be held in accordance with the Executive Board decision on consultation cycle for members with Fund arrangements.