This statement provides information that has become available since the issuance of the staff report. The new information does not alter the thrust of the staff appraisal.

1. The government has adopted a draft supplementary 2013 budget and proposed legislation to reduce mandatory spending indexation in 2014. The draft budget—expected to be enacted in early July—aims to generate savings of about 1 percent of GDP in 2013, mainly through discretionary cuts in current expenditures (largely subsidies) and public investment. For 2014, the government has proposed legislative changes to limit the annual indexation of public wages and pensions to 1½ percent compared to staff calculations in the unchanged policy scenario of 5½ and 4½ percent for wages and pensions respectively based on the current indexation formula. Beyond 2014, wage indexation will be harmonized with pensions. The 2013 package, however, is insufficient to achieve a neutral fiscal stance in structural terms this year as recommended by staff, and, in staff’s view, the underlying measures are of poor quality as they are largely one-off in nature and subject to significant implementation risks that will likely compromise saving yields. On balance, the overall package of proposed consolidation, while a step in the right direction, is by itself insufficient to reverse the upward trend in the public debt-to-GDP ratio over the medium term.

2. The NBS has further eased monetary conditions despite market pressures. In June, the NBS lowered the key policy rate by 25 basis points to 11 percent citing a better inflation outlook, weak demand, and potential positive confidence effects from the planned fiscal consolidation package. While moving to increase somewhat its operations to absorb liquidity, the NBS has allowed the average repo rate—the true gauge of monetary conditions—to also ease further. Meanwhile, pressures in the foreign exchange market have intensified, in line with global market trends, with the dinar depreciating by about 3 percent over the past month despite NBS foreign exchange sales of some €275 million (less than 3 percent of the reserve stock). In the same period, the EMBI spread for Serbia has widened by 160 basis points and recent T-bill and bond auctions have been significantly undersubscribed.

3. The government has taken steps to advance selected structural reforms. An action plan aimed at resolving formerly socially-owned enterprises that was developed with support from the World Bank is expected to be adopted by the government on June 27. The authorities also unveiled plans to accelerate privatization of a few public enterprises and streamline procedures for construction permits. At the same time, while some labor market reform is now envisaged by end-2013, pension reform is not included in the latest reform package, reflecting a lack of broad-based social and political consensus.