Front Matter

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© 2011 International Monetary Fund

July 2011

IMF Country Report No. 11/213

Republic of Serbia: Ex Post Assessment of Longer-Term Program Engagement and Ex Post Evaluation of Exceptional Access—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Republic of Serbia

The following documents have been released and are included in this package:

  • This document was prepared by a staff team of the International Monetary Fund based on information available at the time it was completed on June 29, 2011. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its July 13, 2011 discussion of the staff report that concluded the Ex Post Assessment of Longer-Term Program Engagement and Ex Post Evaluation of Exceptional Access.

  • A statement by the Executive Director for the Republic of Serbia.

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

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Ex Post Assessment of Longer-Term Program Engagement and Ex Post Evaluation of Exceptional Access

Prepared by an Interdepartmental Staff Team1

Approved by the European and the Strategy, Policy, and Review Departments

June 29, 2011


  • Executive Summary

  • I. Introduction

  • II. Overview

    1. Initial Conditions

    2. A Tale of Two Stabilizations: 2001 Stand-by Arrangement and 2002 Extended Arrangement

    3. Vulnerabilities to the Fore: 2006–2008

    4. The Unmasking of an Unsustainable Growth Model: 2009 Stand-by Arrangement

  • III. Key Issues in Fund Engagement: A Tapestry of Achievements and Challenges

    1. Fiscal Policy: A Decade of Stop-gap Measures and Slow Structural Reforms

    2. Monetary Policy: The Quest for an Appropriate Nominal Anchor

    3. Banking Sector: A Remarkable Makeover

    4. State-and Socially-Owned Enterprises: A Difficult Legacy

  • IV. Ex Post Evaluation of Exceptional Access Under the 2009 Stand-by Arrangement

    1. Was Program Design Appropriate?

    2. Was the Fund’s Financing Strategy Suitable?

    3. Were Exceptional Access Procedures Observed?

    4. Performance Under the Program

  • V. Conclusions and Lessons for Future Fund Engagement

    1. What Has Motivated the Long Term Engagement?

    2. Comparing Failure and Success

    3. Lessons Learned

    4. Policy Challenges Going Forward

    5. Future Fund Engagement and Exit Strategy

  • Tables

  • 1. Main Features of Serbia’s IMF Arrangements, 2001–2011

  • 2. Performance Under the Extended Arrangement, 2002–05

  • 3. Monetary Policy Regimes, 2001–2011

  • 4. Financial Soundness Indicators, 2008 and 2010

  • 5. Selected Economic and Social Indicators, 2001–10

  • Figures

  • 1. Long-Term Macroeconomic Developments, 2001–2010

  • 2. Vulnerability Indicators, 2003 and 2008

  • 3. Access, Phasing and Duration in Current and Past Capital Account Crises

  • 4. Comparison of Macroeconomic Projections and Outcomes, 2009

  • Boxes

  • 1. Key Elements of the 2001 Stand-By Arrangement and 2002 Extended Arrangement

  • 2. Export Performance and Business Climate

  • 3. Key Elements of the 2009 Stand-By Arrangement

  • 4. Structural Fiscal Reforms: The Unfinished Agenda

  • 5. The Financial Sector Support Program (FSSP)

  • 6. 2009 FSAP: Summary of Recommendations

  • 7. Labor Market Developments

  • Annexes

  • 1. Structural Conditionality Under the 2002–06 Extended Arrangement

  • 2. Structural Conditionality Under the 2009–11 Stand-By Arrangement

  • 3. The Authorities’ Response

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Executive Summary

In 2001, Serbia was recovering from the ravages of war, international sanctions and economic mismanagement: output had collapsed, inflation was rampant, and the external position was non-viable. Today, the country is an EU aspirant. Macroeconomic stabilization has by and large been achieved, debt is manageable, and there is a modern banking system in place. A Fund-supported program helped the country navigate the global financial crisis, and recovery is in train. But despite these successes, substantial vulnerabilities and a large structural reform agenda remain.

Challenges and progress

Significant progress in achieving macroeconomic stabilization and advancing structural reforms was made under the 2001 Stand-by Arrangement (SBA), reflecting strong policy implementation and political commitment to the program. The ensuing Extended Arrangement (EA) (2002-2006) aimed at consolidating the gains achieved under the SBA and securing debt relief. But performance under the EA was patchy: while important progress was made in several areas, macroeconomic performance fell short of expectations, and structural reforms lagged. Robust but unbalanced growth in an environment of copious capital inflows and high euroization, combined with lingering structural weaknesses, led to rising external imbalances, and ultimately to high external vulnerabilities. When the global economic crisis hit, the authorities requested a SBA, which they intended to treat as precautionary, but which eventually became a disbursing arrangement and was augmented to exceptional access levels. The 2009–2011 SBA achieved its primary objective of preserving macroeconomic and financial stability. The Fund-supported financial sector strategy to safeguard financial stability was one of the program’s clear successes. But opportunities to undertake far-reaching structural fiscal and other growth-oriented reforms were missed.

The role of the Fund

Given Serbia’s fragmented politics and resulting weak coalition governments, an important feature of the Fund’s role was to serve as an internal coordination device. In retrospect, the Fund was least successful in carrying out this role during the EA, where ownership was weak, and more decisive advice on the policy mix could have been provided. By contrast, the Fund’s involvement in the authorities’ 2009 financial system support program under the 2009 SBA was one of several examples of how quick and coordinated action can prevent a crisis. But it was only when there was a confluence between the Fund’s internal coordination role, the promise of financial support, and strong ownership, that the political momentum to undertake bold structural reforms could be found.

The road ahead

The question for the Fund is how to best help Serbia complete and entrench the transition to a more balanced growth model, and tackle its remaining structural reform challenges. The authorities have expressed interest in a new SBA which they intend to treat as precautionary. While there are risks to continued engagement, arising from the difficulties in reaching policy consensus before the upcoming elections, a new arrangement could provide a framework for sound macroeconomic policies and a commitment device, especially if structural reforms are credibly addressed. However, past experience in Serbia suggests that a program can strengthen policy discipline in a politically challenging environment only in the presence of strong ownership.

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Public Information Notice (PIN) No. 11/101


July 27, 2011

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Washington, D. C. 20431 USA

Telephone 202-623-7100

Fax 202-623-6772

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July 13, 2011

Republic of Serbia: Ex Post Assessment of Longer-Term Program Engagement and Ex Post Evaluation of Exceptional Access: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Republic of Serbia
Author: International Monetary Fund