The programme supported by the Policy Coordination Instrument which the IMF approved to the Republic of Serbia in July 2018 was successfully concluded in January 2021.
The programme built on the precautionary Stand-By Arrangement which Serbia successfully concluded in February 2018. It was approved for a 30-month period, was of advisory nature and did not envisage the use of funds.
The aim of the programme was the maintenance of macroeconomic and financial stability, continuation of structural and institutional reforms to encourage faster and inclusive growth, creation of new jobs, and improvement of the standard of living. Though the programme had to be adjusted due to the pandemic, i.e. its focus shifted to the preservation of corporate and financial sectors and the protection of citizens, its key objectives were successfully achieved.
Serbia faced the crisis in a much more favourable macroeconomic position than the previous crises. It boasted vibrant economic growth, low and stable inflation, eliminated fiscal imbalances, significantly reduced external imbalances, and record high FX reserves of the country.
Owing to strong economic foundations and large-scale measures of economic policy makers, as well as the favourable structure of the economy, which now relied less on contact-intensive sectors, including a relatively high share of agriculture and the food industry, the economy declined by merely 0.9% in 2020.
In the course of the programme, significant progress was achieved in terms of modernisation of the Tax Administration, strengthening of the public investment framework and fiscal risk monitoring and management.
An an environment of an unprecedented shock in recent history, the IMF assessed that the responsible approach to leading the country and policy formulation and implementation was enabled by the robust and adequate response in the form of comprehensive and timely support measures for businesses and citizens, without prejudice to price and financial stability. The IMF also concluded that the National Bank of Serbia’s response was timely and robust, aimed at preserving the liquidity of the banking and financial sectors. The National Bank was resolved to make sure that financial conditions remain stimulating for businesses and citizens, with a view to enabling fast and vigorous economic recovery of the country.
Progress in the implementation of the agreed economic programme was monitored through five semi-annual reviews. The IMF Executive Board stated that throughout its duration, the programme was being successfully implemented, as also confirmed by the fact that the decisions on the successful conclusion of the reviews were made even without formal meetings of the IMF Executive Board, which is an opportunity used when assessed that a formal discussion is not needed in light of good macroeconomic results and solid implementation of economic policy measures.
The IMF Executive Board assessed that in the coming period Serbia should accelerate the implementation of structural and institutional reforms to ensure faster convergence to EU income levels. The medium-term reform priorities should include further development of the capital market and improvement of governance.
The PCI is a new IMF support mechanism available to all IMF members. It is of advisory nature and does not envisage the use of funds. It is designed for countries seeking to demonstrate commitment to a reform agenda and is agreed in order to obtain support for an economic programme, when the country has no current or potential balance of payment issues.
Republic of Serbia Successfully Concludes the Three-Year Stand-By Arrangement with the IMF
The three-year stand-by arrangement approved by the IMF to the Republic of Serbia on 23 February 2015, worth SDR 935.4 mn (around EUR 1.2 bn) was successfully concluded on 22 February 2018. By implementing the agreed economic programme, Serbia has attained the objectives concerning the achievement of macroeconomic balance, by ensuring the sustainability of public finance, improving the resilience of the financial sector and strengthening competitiveness and economic growth.
The arrangement was precautionary, meaning that Serbia had no intention to use the funds approved, unless in the case of balance of payments needs. During the arrangement, eight reviews of the agreed economic programme were conducted, which the IMF Executive Board assessed positively. The funds available were not drawn.
The results achieved under the economic programme largely exceeded the expectations. Economic activity recorded steady growth and real GDP is higher than before the world economic crisis, reflecting rising investment, exports and employment. Robust fiscal consolidation was implemented, yielding results much better than expected, owing to firm control of current expenditures and sound revenue collection. Within three years, the general government deficit turned into a surplus, thus securing a stable fiscal position and creating the basis for macroeconomic stability. Significant progress was also achieved in the field of structural reforms, strengthening the growth potential of the Serbian economy, along with job creation and a reduction in fiscal risks. Cooperation with the IMF under this arrangement also resulted in a higher FDI inflow and an upgrade in the country’s credit rating.
During the arrangement, the NBS pursued cautious monetary accommodation in the inflation targeting regime, monitoring the signals from the international environment and the domestic market, thereby giving a key contribution to the country’s economic recovery. Low and stable inflation and financial stability have been achieved, along with the relative stability of the exchange rate, all of which significantly boosted confidence in the domestic market. Interest rates on dinar borrowing were reduced, leading to a rise in lending activity and investment.
Financial sector reforms have increased the resilience of banks, bringing them into a much better position to support the real sector. The measures aimed at reducing the NPL share in total loans, implemented by the NBS in cooperation with the Government, produced excellent results – the NPL level was more than halved compared to 2015. The reforms of state-owned financial institutions are underway. The NBS has begun to implement Basel III standards, thus further reinforcing the central bank’s supervisory function, in accordance with standards of the ESCB.
The Executive Board of the International Monetary Fund (IMF) approved a three-year financial arrangement with FR Yugoslavia (FRY), the so-called Extended Arrangement for SDR 650 (about USD 829 million) to support the FRY's economic program of stabilization and reforms in the period 2002-2005 (Press Release No. 02/25 of May 13, 2002).
The approval will enable the FRY to draw SDR 50 million (about USD 64 million) immediately, when the Arrangement goes into effect on May 14, 2002. The funds provided through the Extended Arrangement would be drawn in 13 tranches of SDR 50 million, subject to the bi-annual economic programme and structural reforms performance criteria assessment.
The new financial arrangement was approved due to achievements and good results of the economic program and structural reforms set in the Stand-by Arrangement of June 11, 2001 as well as sustainable economic stabilization and reforms program of FRY for the period 2002-2005. The core medium-term economic program goals include: achievement of sustainable economic growth, improvement of citizens' living standard, lowering the inflation rate and father strengthening of country's foreign currency reserves. Key reforms will be implemented in the area of foreign exchange market liberalization, improvement of domestic payment system, enforcement of bank supervision, fostering of tax administration and stepping up the privatization process.
The approval of the Financial Arrangement with the Fund will enable FRY to realize the first phase of lowering of FRY external debt towards the Paris Club Creditors amounting to 51%, i.e. about USD 2 billion, in line with the Reconciled Memorandum On the Federal Republic of Yugoslavia's Debt Consolidation, signed on December 28, 2001.
Following the Executive Board discussion, it was announced that 'the IMF commends the FRY authorities on the impressive achievements in stabilization and reform since late 2000, when the FRY succeeded to membership in the Fund.' It was also said that the authorities medium-term economic program, supported by the Extended Fund Arrangement, aimed to achieve further progress in stabilization while providing for the restructuring and investment needs of the economy. The authorities were advised to firmly implement the program in order to keep FRY on a path towards durable growth and external sustainability. The authorities were also commended for demonstrated commitment to reforms in macroeconomic, monetary and fiscal policy and impressive speed with which they moved to implement key structural reforms. It was noted that the authorities' medium-term fiscal policy framework is consistent with achieving lower inflation and fiscal sustainability, cautioning, however, that it was critical for the fiscal sustainability to improve tax administration and streamline expenditure through improved efficiency in the delivery of services and better targeting of benefits.
The IMF welcomed further liberalization of the exchange system which paved the way for the acceptance by FRY of the obligations under Article VIII, Sections 2, 3 and 4, as well as firm intention of the National Bank of Yugoslavia to closely monitor developments in the foreign exchange market and to keep exchange rate policy under close review.
O June 11th 2001 te IMF Executive Board has granted a stand-by loan to the FR Yugoslavia worth 200 million SDR (approximately USD 249 million) as a means to support the Federal Government’s economic programme (Press Release No. 01/31 June 11, 2001).
On that occasion, Mr. Stanley Fisher, First Deputy of the Managing Director and Acting Chairman said:
“The FRY authorities have embarked with impressive speed and commitment on the extremely difficult task of reconstructing their devastated economy. Maintaining this momentum will be key to building broad political support for the reform and securing its sustainability.”
He also stressed that progess toward sustainable growth and external viability would require strong support from creditors and donors and that the Donor Conference on June 29 would provide the international community the opportunity to demonstrate its support by commiting program and project assistance in line with FRY estimated needs.
FR Yugoslavia was immediately granted further 50 million SDR (approx. USD 62 mil). The remaining part will be available in three equal instalments each worth 50 mil. SDR, following the evaluation of the quarterly economic programme performance indicators as was agreed with the IMF.
The results of the stand-by arrangement implementation are monitored quaterly on the basis of the accomplishment of the previously agreed upon quantitative performance criteria (net foreign reserves of the NBY, net domestic assets, borrowings of the consolidated general government from the banking sector, raising of new non-concessional foreign loans by the public sector, and prevention of sccumulation of new arreas under foreign debt servicing), as well as of the structural measures in the fiscal, financial and private sector.