Statement by Daniel Heller, Executive Director for the Republic of Serbia and Vuk Djokovic, Senior Advisor to the Executive Director August 31, 2016

The program is delivering good results, particularly in achieving key macroeconomic objectives. Significant fiscal tightening and efforts to address structural weaknesses have helped boost confidence and restore growth. This has been supported by a healthy credit recovery on the back of substantial monetary policy easing as inflation has been persistently low. Notwithstanding this progress, public debt remains elevated and delays continue in some structural reforms, in part due to recent elections.


The program is delivering good results, particularly in achieving key macroeconomic objectives. Significant fiscal tightening and efforts to address structural weaknesses have helped boost confidence and restore growth. This has been supported by a healthy credit recovery on the back of substantial monetary policy easing as inflation has been persistently low. Notwithstanding this progress, public debt remains elevated and delays continue in some structural reforms, in part due to recent elections.

Serbia continues to make substantial progress in implementing the SBA supported economic program, which is yielding strong results. The recovery is picking up pace, fiscal and current account deficits are on decline and employment is gradually increasing. The public debt already reached a turning point in 2015, and is expected to steadily decline going forward. Growth is driven mostly by private investments and diversified exports. Substantial fiscal consolidation and structural reforms implemented under the program helped regain confidence and boosted private investments. Improved economic conditions and a positive outlook led to the declining sovereign risk premia, as recognized by the recent upgrade of Serbia’s credit rating by Fitch. The incumbent coalition maintained the absolute majority which provided a renewed mandate to the authorities to continue with the implementation of challenging but necessary economic reforms. Serbia is continuing with a tangible progress in the EU integration process as two additional chapters were opened in July 2016. The Serbian authorities remain firmly committed to the program and its objectives and confirm their intention to treat it as precautionary.


The economic recovery, which started in 2015, is well under way and gaining momentum. The projections for GDP growth for 2016 and 2017 have been revised upward. The economy is expected to grow 2.5 percent in 2016, driven by diversified growth of exports, strong private sector investments, and the recovery in domestic consumption. Domestic consumption is supported by higher private sector wages and lower prices for energy and food. Credible fiscal consolidation and implemented labor market and other structural reforms helped improve confidence and investment sentiment. The current account deficit continues to narrow, mostly due to the rebound in exports and strong remittances. Substantial FDI inflows in 2015 and 2016 are well diversified and largely directed toward export-Oriented sectors. The financial account has been hit by global investor repositioning and increased volatility in global financial markets following the Brexit vote; however, flows have reversed lately. Inflation remains below the National Bank of Serbia (NBS) inflation tolerance band, mostly due to low imported inflation and low food prices. In July headline CPI inflation stood at 1.2 percent. The Serbian authorities expect growth to further accelerate in 2017, to 3 percent, slightly higher than staff’s current projection. They agree on the risk to the outlook, but consider the risks to be symmetrically distributed. Key downside risks stem from the activity slowdown in major trade partners, adverse trends in international commodity and financial markets, along with the unfavorable agrometeorological conditions.

Fiscal policy

Sustainable fiscal adjustment—critical for placing public debt on a firm downward path— remains the backbone of the authorities’ SBA supported economic program. Serbian authorities remain committed to maintain fiscal discipline and to implement policies aimed at achieving debt sustainability. Serbia continues to achieve strong fiscal results: 2015 ended with a general government deficit of 3.7 percent of GDP—the best fiscal result since 2008— surpassing by a substantial margin the target set in the third review. The strong fiscal performance is continuing in 2016; preliminary results indicate that the deficit in the first half of the year was below ½ percent of GDP. The good preliminary deficit outturn is the result of strong non-tax and tax revenues (+8 percent y-o-y in Q1-2016). This improvement in revenue collection is mostly driven by improved compliance, reduction in informality and progress in implementing the Tax Administration reform.

Further, while current budget outlays in the H1-2016 were in line with projections, the capital spending turned out higher than expected; mostly due to good execution of public infrastructure projects. The authorities remain well aware of the existing weaknesses in the public sector investment framework, and stay committed to press forward with reforms to streamline appraisal, planning, and execution of infrastructure projects. Expenditures for wages and public sector pensions continued to gradually decline in real terms during 2016, as a result of the hiring freeze, rationalization in the public sector, and the effects of parametric pension reform introduced in 2014.

The recently submitted amendments to the Law on Financing of Local Government are addressing the issue of inter-regional equity, while ensuring more balanced distribution of the consolidation efforts between central and local governments.

Lastly, public debt already reached a turning point at 77.4% of GDP in 2015, and started a firm declining path with the objective of reaching 60 percent of GDP by 2023.

Monetary and exchange rate policies

The monetary policy stance of the NBS remains accommodative, consistent with its price stability objective. Further policy easing remains contingent on the pace of ongoing fiscal adjustment and external developments. Since the beginning of the year, the NBS has lowered the key interest rate twice, in February and again in July, by a cumulative 50bps. The cut in July was driven by low headline inflation, an expected slowdown in the euro zone, high liquidity in international markets, and falling oil and agricultural prices from June onward. Further, the decision was informed by declining inflation expectations. The one-year-ahead inflation expectation fell to 2.8 percent in the financial sector and to 2 percent in the industrial sector—below the central point of the NBS tolerance band—corroborating the appropriateness of the accommodative stance. The policy easing is resulting in lower bank lending rates and a gradual pick-up in the credit activity; credit grew 2.4 percent y-o-y in Q2.

The Serbian authorities remain committed to the inflation targeting regime, as it is yielding good results. The current level of international reserves is high and adequate by standard metrics. The central bank remains committed to maintain adequate coverage throughout the program. The NBS continues to be committed to its managed float exchange rate policy, with the foreign exchange interventions limited to smoothing excessive exchange rate volatility without targeting a specific level or path for the exchange rate.

Financial sector

The Serbian banking sector remains stable with robust capital buffers, as confirmed by the 2015 Special Diagnostic Studies. In March, the capital adequacy ratio stood at 21.5 percent, well above the regulatory minimum of 12 percent and above the regional average. Solvency and liquidity stress tests, regularly performed by the NBS, confirms the robustness of the banking sector. Even under the most adverse scenario solvency and liquidity indicators remain above the regulatory minimum. Profitability of the sector is on the rise, driven by increasing interest rate margins and the recovery of lending.

Progress in implementing the non-performing loan (NPL) resolution strategy, which was adopted in August 2015—an effort to remove barriers to clean banks’ balance sheets, and unclog lending—is yielding positive results, as total gross NPLs declined by around two percentage points. While the NPLs still remain high, they are fully provisioned. The NBS implemented a range of prudential and regulatory measures envisaged under the NPL strategy, including the strengthening of its supervisory and regulatory frameworks, to enhance distressed asset management and regulatory treatment of restructured receivables. The NBS also provided guidance to banks on improving provisioning practices and the asset quality reporting. Furthermore, the Serbian authorities remain committed to complete the remaining measures envisaged in the NPL strategy, including: (i) further strengthening of the insolvency framework, (ii) improving secured creditors rights, (iii) issuing official explanations regarding tax deductibility of distressed debt write-offs, (iv) introducing a new legal framework for real estate appraisers, (v) clarifying the scope of business secrecy and data protection laws, and (vi) strengthening the judiciary. The government is also updating its strategy for the remaining state-owned banks and initiating preparation for the privatization of Komercijalna banka. It also issued a guidance to the state-owned Banka Poštanska Štedionica, to gear its business model towards retail and SME market segments, in line with staff recommendation.

State-owned (SOE) and socially-owned enterprise reforms

As pointed out by staff, the authorities are achieving substantial progress with systemically resolving socially-owned companies in the portfolio of the Privatization Agency (PA). Bankruptcy moratorium for the last 17 socially-owned companies under moratorium protection was lifted in May, and no company remains shielded from the application of corporate, tax and other laws. Around 330 companies in the PA portfolio have been resolved so far, through either bankruptcy or privatization. Around 20,000 employees from the resolved companies received severance payments, while around 45,000 employees remain in around 200 companies which still to have to be resolved.

The Serbian authorities are well aware of fiscal risks stemming from the large, unrestructured SOEs. They continue to work with the support of IFIs, including World bank and EBRD in advancing SOE restructuring agenda, with the following objectives: (i) address organizational, financial and governance issues in SOEs, (ii) minimize fiscal risks, and (iii) reduce state aid to SOEs substantially and on a systematic basis. The focus is on three major companies in the electricity, gas distribution and transportation sectors. Financial and corporate restructuring plans for the electricity utility EPS and the Serbian Railways have been adopted and are in process of implementation. Organizational restructuring for the gas distribution utility Srbijagas was implemented in 2015; while the debt restructuring plan is set to be adopted in October 2016, following the completion of financial due diligence.