28.06.2023.
On 28 June, the Executive Board of the International Monetary Fund (IMF) made a decision on successful completion of the first review of the results of the economic programme of the Republic of Serbia, supported by the stand-by arrangement (SBA), and concluded regular consultations under Article IV of the IMF’s Articles of Agreement that were held with our country.
In making the decision, it was noted that the Republic of Serbia is successfully implementing the agreed economic programme. All the criteria based on which the programme results are monitored have been met. The achieved balance of payments and fiscal results outperformed the expectations, and the implementation of the structural reform agenda is advancing well.
“The IMF Executive Board’s decision confirms that an adequate economic policy is being implemented in Serbia, which they expect going forward as well. Even in times of global uncertainty, Serbia has proven itself as a country that has provided its citizens and corporates with what they needed the most in such circumstances – stability”, assessed Governor Jorgovanka Tabaković.
The IMF assessed that during the last decade, despite external shocks, Serbia has achieved impressive economic results, reflecting its robust economic policy that supported strong growth, low inflation and declining public debt. As a result, incomes rose, employment increased, and living standards improved. Foreign exchange reserves are significantly higher and FDI inflow is at record levels. In addition, the high and diversified FDI inflows have more than covered the current account deficit. Though Covid-19 pandemic negatively affected the growth of all economies, the Serbian economy quickly recovered, supported by a strong package of numerous fiscal and monetary policy measures, as well as the NBS’s measures in the financial sector.
Nevertheless, the consequences of the conflict in Ukraine and the crisis had negative effects on the domestic economy as well as on all our trade partners, and their resolution increased the need for fiscal and external financing in 2022. Mounting global cost-push pressures also reflected on the growth of global and domestic inflation. In the current global conditions, it is expected that, with the continued implementation of a cautious monetary policy, y-o-y inflation will decline to around 8% by the end of the year and return within the NBS’s target tolerance band in 2024. Working in the same direction as the NBS’s measures will be the global tightening of financial conditions, a better than the last year’s agricultural season, the waning of the negative effects of supply-side shocks and the decline in primary commodity prices. Consistent with all this, medium-term inflation expectations of the financial sector remained anchored. Fiscal policy is expected to stay relatively tight in 2023 as well, despite the additional measures in mid-2023. The projected fiscal deficit, which is not expected to exceed 3% of GDP in 2023, will support disinflation and further public debt reduction.
“Y-o-y inflation has been on a decline since April, and is expected to fall more sharply by year end and return within the bounds of the 3±1.5% target in mid-2024. In the coming period, in an environment of the still pronounced challenges from abroad, we will continue to carefully calibrate monetary policy decisions, relying on the flexibility of the monetary framework we have created, which enables prompt response”, pointed out the Governor.
The IMF pointed out that Serbia’s outlook remains favourable in the medium-term as well, expecting GDP’s return to the 4% growth path, inflation within the bounds of the NBS’s target, country’s sustainable external position and robust public finance. Continuous macroeconomic stability, an ambitious structural reform agenda and Serbia’s proven proactive countering of numerous shocks have additionally increased its attractiveness as investment destination for increasingly diverse FDIs. In its Report the IMF also stated that despite the huge turbulences in the global money market, the relative stability of the dinar exchange rate has been preserved, while FX reserves are at record levels. The financial sector demonstrated its resilience amid high uncertainty, with capital adequacy and liquidity ratios staying well above the regulatory floors. At the same time, NPL ratio is at its lowest level on record.
“We have maintained the relative stability of the dinar exchange rate against the euro even in globally challenging and aggravated circumstances, this being an important pillar of the country’s overall stability and certainty of doing business. We raised FX reserves to an all-time high of EUR 22.1 bn at end-May. We also preserved full financial stability, with high capitalisation and liquidity of our banking sector and a record low level of NPLs. Policy coordination and timely and adequate measures have enabled Serbia, in the face of a multidimensional and years-long crisis, to preserve the stability of its economy and consumer and investor confidence, as evidenced by the around 9% cumulative real GDP growth in the period 2020-2022, record high FDI inflow and continued increase in private sector employment and wages“, concluded the Governor.
The IMF Executive Board’s positive assessment of Serbia’s performance enables the withdrawal of funds in the amount of SDR 164 mn (over EUR 200 mn), which will bring the total funds drawn under the arrangement to SDR 949 mn (about EUR 1.2 bn). Going forward, if the external environment is supportive, SBA may be treated as precautionary at the time of the second review, which is earlier than expected at its approval.
(The current SBA was approved to the Republic of Serbia on 19 December 2022, for a period of 24 months, in support of the agreed economic programme. The goals of the economic programme are to preserve macroeconomic and financial stability with appropriate policy modifications for current economic shocks, to strengthen the economy’s resilience to the energy crisis by implementing an appropriate energy policy and reforms in order to solve the challenges in the domestic energy sector and at the same time protect the most vulnerable categories, and to foster higher, greener, and inclusive sustainable growth over the medium-term by implementing comprehensive structural reforms. The results of the programme are monitored within regular semi-annual reviews.)
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