The Serbian economy has continued to grow strongly, but external imbalances have widened along with vulnerabilities. To contain domestic demand, fiscal surpluses are needed, until the benefits of structural reforms are reaped. Low inflation should be entrenched by adoption of inflation targeting once government support and sound fiscal policies are in place. Competitiveness should be restored through corporate restructuring and wage moderation. Accelerating structural reforms is the key. Financial stability risks have been managed by building adequate buffers. The supervisory framework should continue to be strengthened.
This statement provides information that has become available since the issuance of the staff report for the 2007 Article IV Consultation. The new information does not alter the thrust of the staff appraisal.
1. Growth slowed in the third quarter of 2007, due in part to the impact of the summer drought on agriculture, but less than expected. The Statistical Office projects GDP growth of 7.5 percent in 2007, slightly higher than the staff’s projection of 7 percent.
2. Inflation increased in December, driven by food and oil prices. End-2007 headline and core inflation reached 10.1 and 5.4 percent respectively, slightly exceeding staff’s projections. On December 27, the NBS raised the repo interest rate by 50 bps to 10 percent.
3. The current account deficit widened to 16.6 percent of GDP between January and November 2007, fueled by high import growth. The current account deficit for the full year 2007 is likely to exceed staff’s projection of 16.1 percent of GDP.
4. Credit also rose sharply. Its twelve-month growth, adjusted for inflation, increased from 28 percent in October to 36 percent in November.
5. Fiscal deficits could be larger than expected. Preliminary staff estimates for 2007 indicate that the deficit could exceed projections in the staff report by ½ to 1 percentage point of GDP, due to high end-year spending on goods and services, capital investment, and pension arrears. The 2008 budget, adopted on December 26, 2007, envisages a deficit that exceeds the staff projection by about ¼ percentage point of GDP, largely on account of higher spending by social funds.
6. Financial markets have remained volatile since the end of 2007 amid global financial turmoil and political uncertainties (see text figure).
7. Based on a government decision, Serbia is expected to sign an agreement with Russia on cooperation in the oil and gas industries on January 25. Staff understands that the agreement will enable talks to begin on a contract with Russia’s Gazprom on an underground gas storage facility and a gas pipeline, as well as on the sale and development of the state-owned oil company NIS.