IMF: Successful completion of second review of Serbia’s economic programme – macro-financial stability maintained, medium-term outlook remains favourable, supported by authorities’ commitment to structural reforms

On 24 June, the IMF Executive Board (IMF Board) made the decision on the successful completion of the second review of Serbia’s economic programme, supported by the Policy Coordination Instrument (PCI).

In making the decision, the Board stated that the programme implementation has been broadly on track. The Serbian economy has navigated the COVID-19 pandemic well and macro-financial stability has been maintained despite various shocks from the international environment. In 2021, real GDP growth strongly rebounded by 7.4%, supporting a narrower fiscal deficit and a decline in the public debt to GDP ratio, and consistent with a return to the pre-pandemic medium-term growth trend. Fiscal performance in 2021 is also assessed as better than anticipated.

Like other economies worldwide, Serbia faces the consequences of the conflict in Ukraine that weigh on global growth, increase inflationary pressures and fuel uncertainty.

The IMF Board underlined that the Serbian authorities responded swiftly to new shocks in the global market to maintain financial stability at home, help businesses that operate against the backdrop of international sanctions and disruptions to global supply chains, and mitigate the spillover of the high global primary commodity prices on the local market. Serbian policymakers have a strategic focus on ensuring smooth energy supply in these extraordinary circumstances and on the necessary medium-term reforms in the energy sector. Responding appropriately to inflationary pressures, the NBS has raised the key policy rate three times since April this year.
The IMF Board expects that lower growth of trading partners and higher global primary commodity prices will curtail Serbia’s GDP growth to around 3.5% in 2022.

As cited in the reports considered by the IMF Board, despite uncertain environment, macro-financial stability in Serbia has been maintained, and the medium-term growth outlook remains favourable, supported by the authorities’ commitment to structural reforms.

“The decision of the IMF Executive Board was expected and represents yet another confirmation of the credibility of the economic policy that is consistently pursued by the Serbian authorities. The IMF’s medium-term macroeconomic framework for Serbia envisages 4% growth, inflation within the NBS target tolerance band and sustainable public finances. It also envisages improvement of fiscal metrics, including a firmly downward path of the share of public debt in GDP, and the continuity of high capital investment and FDI inflows. This means that even in the current circumstances the IMF expects the continuity of sound policies and preservation of stability“, said Governor Jorgovanka Tabaković.  

As regards monetary policy, the IMF Board assessed that in response to inflationary pressures, the NBS has tightened monetary policy appropriately since October 2021, including by increasing the key policy rate in 2022, to 2.5%. Core inflation stayed significantly lower than headline inflation, and medium-term inflation expectations remain anchored, underpinned strongly by the preserved relative stability of the exchange rate of the dinar. The Board’s view is that monetary conditions should be tightened further if needed.  

The IMF Board stated that the banking sector is well-capitalised and liquid, commending the NBS’s decisive action in case of Sberbank Srbija, which enabled a fast implementation of a transaction whereby this bank has become a part of a local banking group with high capitalisation and a strong liquidity position. The NBS has thus prevented a spillover of external shocks to the domestic banking sector and maintained confidence in the financial system.  

The Board stressed that the Serbian economic policy makers should reinvigorate the planned structural reforms for continued strong, sustainable and inclusive growth.

The identified policy priorities are to preserve macro-fiscal and financial stability and mitigate the impact of external shocks.  

”The priorities of the NBS are well-known – ensuring price and financial stability in the medium run. Faced with heightened challenges from the international environment, the NBS will continue to carefully calibrate each decision. The flexibility of our monetary framework, which we created ourselves, enables us to respond in the shortest time if necessary. Despite additional, and perhaps never greater, challenges, we have maintained full financial stability, along with high capitalisation and liquidity of the banking sector and a record low level of NPLs. I believe that the preserved key buffers against shocks, such as FX reserves and financial system liquidity, together with the strategic measures of President Vučić and the Government of the Republic of Serbia in these extraordinary circumstances, are a proof that we will always work in the interest of our people and economy”, concluded Governor Tabaković.

(The current PCI was approved to the Republic of Serbia on 18 June 2021 for a 30-month period. It is of advisory nature and does not envisage the use of funds. The advisory programme aims to support a faster economic recovery of the Republic of Serbia from the effects of the pandemic, to maintain macroeconomic and financial stability and to advance an ambitious structural reform agenda with a view to fostering strong, inclusive and sustainable growth over the medium term. The reforms contained in the programme reflect the Serbian authorities’ policy and agenda, including: strengthening the fiscal framework, enhancing governance in state-owned enterprises, development of the capital market, further promoting dinarisation, improving social safety nets and transition to the green economy. The programme implementation is reviewed semi-annually.)

Governor's Office