Washington: An International Monetary Fund (IMF) mission, led by Jan Kees Martijn, held virtual meetings with the Serbian authorities during October 5 – 16, 2020, to discuss the fifth and final review under the PCI. At the conclusion of the mission, Mr. Martijn issued the following statement:
“The IMF mission held productive discussions with the authorities and reached staff-level agreement on policies needed to complete the fifth review under the PCI. Successful completion of the review is subject to meeting the remaining program conditions, and approval by the IMF Management and Executive Board. Consideration by the Board is tentatively scheduled for early January 2021.
“Program implementation has remained broadly on track and economic activity has rebounded following a sharp contraction in the second quarter of 2020 caused by the COVID-19 pandemic. The monetary and financial measures and large fiscal package deployed in response to the crisis have played a key and welcome role in supporting the economy. Real GDP growth is now projected to contract by 1.5 percent in 2020 and rebound to 5 percent in 2021. These forecasts incorporate recent data showing a faster recovery than we anticipated earlier, and update the forecasts released with the IMF World Economic Outlook on October 13. However, the outlook remains highly uncertain, reflecting the unpredictable course of the epidemic and related economic disruptions in Serbia and its trading partners. Inflation has remained low and is expected to stay within the lower half of the NBS inflation target range in 2021. The banking system has remained stable, liquid and well capitalized.
“Tax revenues have been stronger than expected at the time of the fourth review of the PCI, but expenditures will also be higher, as the fiscal measures were extended and public investment execution will be accelerated in the last quarter of this year. In this context, the overall fiscal deficit is projected to be less than 9 percent of GDP in 2020, with public debt staying below 60 percent of GDP.
“The mission agreed with the authorities on the key parameters of the 2021 budget. The budget has to strike a balance between sustaining the economic recovery and maintaining fiscal responsibility. In light of the ongoing economic rebound, a reduction in the fiscal deficit to 3 percent of GDP would be appropriate for the budget that is currently in preparation, ensuring that public debt in percent of GDP resumes a clear downward path. Within this budget envelope, scaling up public investment, including green investment, will not only support the recovery but also boost potential growth. To make room for this, and given elevated fiscal risks, including from troubled SOEs and loan guarantees, it is important that the public sector wage bill as a share of GDP declines to more sustainable levels, after rising in the last three years. Hence, increases in public sector wages should be limited in 2021. Pension increases should follow the agreed Swiss formula, and additional ad-hoc increases or payments should be avoided. Fiscal risks from SOEs need to be monitored closely, and any support to these companies should be provided transparently through the budget.
“After some delays due to the pandemic, the implementation of structural reforms needs to be accelerated to secure strong and stable growth in the medium term. Ongoing efforts are needed to strengthen the tax administration, public investment management, and the monitoring and management of fiscal risks. Reforms of public sector wage and employment frameworks, which have faced substantial delays, should be completed. Enhancing the corporate governance of public enterprises, including EPS, and developing Serbia’s capital market remain vital. Progress towards completing the privatization of Komercijalna Banka is welcome, and we encourage further efforts to privatize Petrohemija. Medium-term priorities to create conditions for faster private sector growth and convergence to EU income levels also include strengthening the rule of law and improving the court system.
“The mission is grateful for the authorities’ close cooperation.”