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IMF approves new PCI for Serbia

The International Monetary Fund (IMF) has approved a new 30-month Policy Coordination Instrument (PCI) for Serbia.

The PCI-supported programme will build on the precautionary Stand-By Arrangement successfully completed in February 2018 and aims at maintaining macroeconomic and financial stability and advancing an ambitious structural and institutional reform agenda to foster rapid and inclusive growth, job creation and improved living standards. Program reviews will take place on a semi-annual fixed schedule. While the PCI involves no use of IMF financial resources, successful completion of program reviews will help signal Serbia’s commitment to continued strong macroeconomic policies and structural reforms.

Following the IMF’s decision, Tao Zhang, deputy managing director and acting chair of the IMF Executive Board, issued the following statement:

“Serbia has chosen to cement the success of its 2015-18 Precautionary Stand-By Arrangement with a new economic reform program focused on strengthening institutions and improving competitiveness for faster growth, which are critical to secure sustainable growth and faster convergence with EU living standards. The programme maintains a strong fiscal position and foresees a continued decline in public debt, while also accommodating growth-enhancing measures. Increased public investment would likely deliver the strongest growth dividend, especially as Serbia continues to improve the selection, appraisal, and preparation of infrastructure projects. Targeted tax measures can also improve incentives for investment and employment and reduce informality.

“Monetary policy under the inflation targeting framework is reducing inflation and inflation expectations, while also supporting economic activity. With still elevated levels of euroisation, full implementation of an updated dinarisation strategy, including better agency coordination and allowing more short-term exchange rate flexibility, will strengthen monetary policy transmission and market development.

“Financial sector reforms will reinforce stability and improve intermediation. Efforts to reduce NPLs are yielding good results, but greater attention is needed to resolve bad assets of public financial institutions, including the development agencies and the Deposit Insurance Agency. Addressing AML/CFT weaknesses identified by FATF will be important for ensuring continued strong foreign investment and improving the business climate.

“Structural and institutional reforms will gradually strengthen Serbia’s potential growth, helping to prepare the country for EU accession. Priorities supported by the programme include strengthened tax administration and public investment management, an improved business climate, reduced informality, and a recasting of the role of the state away from direct participation in the economy towards supporting a full market economy.”

Growth in Serbia reached 4.6 per cent year-on-year in the first quarter of 2018 and is expected to reach at least 3.5 per cent in 2018, driven by consumption, investment, and exports. Inflation remains low, and is projected to be around 2 per cent at end-2018, supported by the appropriate monetary policy of the National Bank of Serbia. Budget results for the first quarter of 2018 point to another year of fiscal surplus.

Nonetheless, Serbia remains susceptible to spillovers from regional and global developments and market volatility, including potential increased risk aversion for emerging markets. On the domestic front, delay in delivering on structural reforms, or erosion of fiscal discipline, could undermine confidence and reduce medium-term growth prospects.