Abstract
The fifth review of Serbia’s economic performance under the program supported by a Stand-By Arrangement (SBA) is discussed. It helps in addressing the spillovers from the global financial crisis while establishing a moderate economic recovery. An accelerated pace of structural reforms will help to strengthen medium-term growth and employment prospects, supported by the resumption of adequate capital inflows, in particular through foreign direct investment. A strong commitment to the implementation of structural reforms will strengthen medium-term growth and employment prospects.
This statement provides information that has become available since the issuance of the staff report (EBS/10/174). The new information does not alter the thrust of the staff appraisal.
1. The prior action for the fifth review has been completed. The government submitted to parliament on September 17 an amended Budget System Law, introducing a numerical fiscal balance rule and a ceiling on gross public debt, including public guarantees, as well as supporting spending rules limiting the growth of public wages and pensions (for additional details see LOI,¶13, and TMU,¶20).
2. A one-off payment to pensioners will likely take place in October. Top coalition leaders have agreed that much of the available sum for budgetary re-allocations in the 2010 budget (about RSD 6 billion or 0.2 percent of GDP, resulting from underexecution of spending) will be allocated to a one-off payment to pensioners. Pensioners eligible for this payment will be those whose monthly pensions fall below a threshold of some €300. Including a previously agreed amount of RSD 2 billion, the total one-off payment to pensioners is projected at about RSD 6½ billion (about €50 per eligible pensioner). As indicated in the LOI (¶9), this decision will leave little scope to satisfy additional spending demands.
3. The August inflation release surprised somewhat on the upside. Inflation rose to 6.6 percent year-on-year in August, compared with 5.1 percent in July. This largely reflected increases in processed food prices, particularly of meat, dairy products, and edible oils. Assuming some persistence in food price inflation during the remainder of the year, inflation at the end of 2010 could be close to 8 percent—the upper bound of the NBS’s target band—instead of 6¾ percent as currently projected. However, given the recent steps to tighten the monetary stance, the NBS’s end-2011 target band (4.5±1.5 percent) remains well within reach.