Journal Issue

Statement by Fritz Zurbrügg, Executive Director for Serbia and Montenegro and Srboljub Antic, Senior Advisor to Executive Director

International Monetary Fund
Published Date:
July 2004
  • ShareShare
Show Summary Details

June 7, 2004


The authorities of Serbia and Montenegro appreciate the fruitful cooperation with the Fund and the continued support from staff and management. They thank Mr. Zervoudakis and his team for the valuable policy advice that helped Serbia and Montenegro achieve and maintain macroeconomic stability and proceed with structural reforms.

The staff report gives a fair picture of recent developments and trends in the economy of Serbia and Montenegro. It highlights the country’s accomplishments under the Extended Arrangement, as well as the numerous challenges that the policymakers are still confronted with. Our authorities broadly share staff’s conclusions, knowing that the challenge lies in finding the appropriate way of implementing the recommendations in a given political and social environment. In line with the now well-established tradition, the authorities of Serbia and Montenegro consent to the publication of the staff documents.

As noted in the staff report, Serbia and Montenegro’s current political environment is quite sensitive. The new Serbian coalition government only has a minority in Parliament, and the upcoming presidential elections in June add an element of uncertainty. It is important to note that the legislative process, which had been blocked for several months, is back on track again. Despite the generally difficult political environment, the authorities were able to move forward with important reform laws (energy, bankruptcy) in the parliamentary process.

Staff presents the sensitivity of this particular moment in a frank manner. Our authorities are aware of the heightened risks associated with the current situation. They are committed to a strict implementation of the program supported by the IMF and have undertaken corrective measures to address the economic problems in line with the staff recommendations.

Recent developments

The estimated GDP growth rate of 3 percent in 2003 was lower than projected, due to a drought that heavily affected agricultural output. The service sector remained the main source of growth. In 2004, however, the economic situation is expected to improve significantly. Industrial output recorded double-digit growth in Q1 2004 and the growth rate is forecast to remain between 8 and 9 percent for the first half of the year. Furthermore, agriculture is expected to rebound, reversing the effect of last year’s drought. Therefore, the authorities are optimistic that GDP growth could even surpass the projected rate of 4-5 percent.

Due to prudent monetary policy, the inflation rate in 2003 declined further, and was lower than targeted. It is important to note that RPI inflation was halved to 7.8 percent despite the depreciation of the dinar. This indicates a change in the long standing paradigm of almost one-to-one pass-through of exchange rate depreciations. Inflation in 2004 is targeted to stay within a range of 8 to 9 percent. Data for the first four months show that this ambitious goal should be attainable, even in light of the planned increase in administered electricity tariffs in July. Over the medium term, inflation should converge toward EU levels.

Curbing the high current account deficit, which reached 12.6 percent of GDP in 2003, is becoming an increasingly important task on the reform agenda. The authorities are addressing the problem by using a policy mix based on fiscal adjustment and improvements in competitiveness in the traded goods sector. The expected upturn in foreign demand should have a positive effect on exports, thus alleviating the current account problem.

Fiscal policy

In 2004, supporting the stabilization of the external account will be the main task of fiscal policy. The authorities have appropriately tightened the fiscal stance with an adjustment amounting to 0.8 percent of GDP.

In Serbia, fiscal adjustment will be achieved mainly by raising revenues. Expenditures will change in structure but stay at the same level in relation to GDP. On the revenue side, indirect taxation will become more important, while direct taxation will decrease. This should result in efficiency gains. As mentioned in the Supplemental Letter of Intent, wages in the health care sector will be increased to keep the qualified personnel in the public sector. To cover the additional expenses of about 0.1 percent of GDP, health fund contribution rates will be raised accordingly. With the medium-term objective of reducing the state involvement in the economy, the authorities are aware that raising the fiscal burden can only be a temporary policy. Therefore, they envisage further fiscal adjustments in 2005 aimed at the tax relief and implementing durable expenditure cuts.

The tax reform package will go to Parliament in June 2004. The core of the package is the VAT law that will be introduced in January 2005. The VAT, which replaces the cascading sales tax, will be broad-based and have no more than two rates. The authorities expect the VAT to significantly reduce the scope of the gray economy. Furthermore, the distortionary financial transaction tax will be eliminated to improve financial intermediation. To boost revenues of local communities, the local property tax will become progressive.

In Montenegro, the two main pillars of the fiscal adjustment are expenditure cuts and lowering of the tax burden for businesses in order to stimulate job creation. The Supplementary Budget was approved in May by the Parliament, thereby achieving the fiscal adjustment of 1.2 percent of GDP (excluding foreign loan financed projects). To ensure fiscal and external sustainability, the authorities plan to successively lower the fiscal deficit.

Monetary policy

The National Bank of Serbia (NBS) has maintained tight credit conditions to keep the inflation rate within the projected range of 8 to 9 percent. Credit growth will rise at a slightly higher rate than the projected inflation, alleviating external pressures. To improve transparency in the relations between the NBS, the Treasury and commercial banks, all government deposits will be transferred to the NBS by mid-2004, while the NBS will withdraw its deposits from commercial banks by February 2005.

The NBS has strengthened its supervision capabilities over the banking sector and started to supervise the non-bank sector as well. Full scope on-site examinations are more frequent and have already resulted in the closure of three non-bank financial institutions in 2004. The Central Bank of Montenegro (CBM) has made significant progress in supervision by introducing most of the Basel Core Principles.

The exchange rate policy will continue to focus on safeguarding the external position while containing inflation. To support external competitiveness, the exchange rate will be kept flexible. Maintaining a high level of foreign exchange reserves will be crucial to accommodate the expected rise in external debt service in the coming years.


With a big share of viable companies already privatized, the authorities will start selling assets via the new bankruptcy process and prepare large inefficient, state-owned enterprises for privatization. The new Company and Bankruptcy Laws in Serbia will reinvigorate the restructuring of large conglomerates and utilities, while at the same time enable the creation of clear strategies for the selling of assets of bankrupt companies. As the least problematic companies have already been privatized, the privatization revenue projections for 2004 are cautious. However, higher privatization revenues are expected in 2005 when the telecommunication sector will be ready for privatization. In Montenegro, a large steelworks company has recently been privatized, and the authorities will start the process of selling the telecommunication company this year, with the planned finalization of the sale next year.

After a delay due to the protracted government election process, the restructuring and privatization of the banking sector is set to continue. The government in Serbia will soon publish the strategy and timetable to divest the equity owned by the state in 16 banks. Three mid-size viable banks will be privatized in 2004. The privatization revenues expected from bank privatizations are commensurate with the planned revenues from the enterprise sector. Furthermore, it is expected that one of the largest banks in Serbia will be ready for sale in the second half of 2005. In Montenegro, the tender for sale of a mid-size bank will be launched in the second half of 2004, with the final sale planned for 2005.

Debt negotiations

Although the latest debt negotiation round with the London Club creditors did not come to a conclusion, the authorities want to reassure the Board that they will continue to negotiate in good faith. The goal of the authorities is to achieve an agreement with the London Club that is comparable to the one with the Paris Club.


The authorities of Serbia and Montenegro are fully aware that the reform process has recently slowed down due to the prolonged process of electing and forming a new government in Serbia. They want to emphasize their full commitment to preserving macroeconomic stability, speeding up structural reforms and making progress in creating stable institutions. The prospect of the Stabilization and Association Agreement with the EU provides the opportunity and strong incentive to push ahead with the reform process.

Other Resources Citing This Publication