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IMF Country Report No. 22/201

REPUBLIC OF SERBIA

SECOND REVIEW UNDER THE POLICY COORDINATION INSTRUMENT AND REQUEST FOR MODIFICATION OF TARGETS—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR REPUBLIC OF SERBIA

June 2022

In the context of the Second Review Under the Policy Coordination Instrument and Request for Modification of Targets, the following documents have been released and are included in this package:

• A Press Release including a statement by the Chair of the Executive Board.

• The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 24, 2022, following discussions that ended on March 22, 2022, with the officials of Republic of Serbia on economic developments and policies underpinning the IMF arrangement under the Stand-By Arrangement. Based on information available at the time of these discussions, the staff report was completed on June 7, 2022.

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

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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© 2022 International Monetary Fund

Press Release

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PR22/230

IMF Executive Board Completes Second Review Under the Policy Coordination Instrument and Modification of Targets for the Republic of Serbia

FOR IMMEDIATE RELEASE

• Serbia’s economic growth rebounded strongly at 7.4 percent in 2021. The war in Ukraine, energy sector challenges and high inflation are expected to lower growth in 2022 to 3.5 percent amid high uncertainty.

• Monetary policy is being tightened in response to continued high domestic and global inflation.

• A sound action plan and reforms in the energy sector would provide important assurance for the economic outlook.

Washington, DC-June 27, 2022: The Executive Board of the International Monetary Fund (IMF) concluded the Second Review Under the Policy Coordination Instrument (PCI)¹ forthe Republic of Serbia.

The PCI was approved on June 18, 2021 (see Press Release No. 21/189) and aims at supporting the recovery from the pandemic, maintaining macroeconomic stability, and anchoring the medium-term fiscal policy framework, while pushing ahead with structural reforms to deliver more inclusive and sustainable growth.

The war in Ukraine and an energy crisis have disrupted the strong recovery from the COVID-19 pandemic. Following economic growth of 7.4 percent in 2021, growth in 2022 is projected markedly lower at 3.5 percent, dampened by the impact of high inflation on consumer demand, curtailed trade with Russia, and lower external demand. Driven by soaring global food and energy prices, inflation has increased to 10.4 percent in May 2022, while core inflation remained lower at 6.3 percent. Specific challenges arose in the energy sector when shortfalls in domestic electricity production coincided with rising global energy prices in the 2021–22 winter, increasing total energy costs by about 2 percent of GDP.

Faced with these new shocks, the authorities acted swiftly to preserve financial stability, help companies navigate the international sanctions regime and supply chain disruptions, mitigate the pass-through of high global commodity prices through regulation, and provide financing for energy imports. The authorities have also started to secure energy supply and address the medium-term reform needs in the energy sector. Thus far, higher than budgeted tax revenue has covered the new spending measures. The monetary policy rate has been increased three times since April in response to continued high inflation.

Risks to the near-term outlook remain elevated and mostly to the downside. They include a potentially prolonged war in Ukraine with further pressures on energy and commodity prices, supply chain disruptions, and lower external demand, as well as continued production shortfalls in the energy sector.

Policy priorities have shifted again to supporting the economy in a crisis situation, while the economic policy objectives supported by the PCI remain an appropriate anchor. Provided that global inflation moderates, inflation should return to within the NBS target band over the medium term.

At the conclusion of the Board discussion on the second review of the PCI for Serbia, Mr. Kenji Okamura, Deputy Managing Director and Acting Chair made the following statement:

“Serbia has demonstrated its resilience during the Covid-19 pandemic, but the war in Ukraine, high inflation, and the energy crisis pose new challenges. The authorities’ policies have helped mitigate the immediate impact of these shocks and preserved macro-financial stability. Nevertheless, the near-term outlook is subject to downside risks and high uncertainty.

“Supported by strong revenue collection, the fiscal deficit target of 3 percent of GDP for2022 remains appropriate and feasible. Fiscal support for the energy sector in the past winter amidst soaring import prices and electricity production outages helped maintain energy supply. Should economic disruptions warrant further support to affected groups or activities, it should take the form of targeted measures and be accommodated through spending reprioritization.

“Reforms of the energy sector are urgently needed, including to restore reliable supply and ensure cost recovery. A strategy for the state-owned power company Elektroprivreda Srbije (EPS), and timely adoption of the National Climate and Energy Plan will provide an essential framework for energy investments in particular in renewable sources.

“Amidst ongoing global and domestic inflationary pressures, monetary policy tightening has rightly continued to curb inflation expectations and help bring inflation back within the inflation band over the policy horizon.

“Structural reforms should continue to underpin medium-term growth. The new fiscal rules, expected to be launched with the 2023 budget, will provide an important anchor for medium-term fiscal discipline. The planned primary dealer system will support capital market development.”

^{Table 1.}

Serbia: Selected Economic and Social Indicators, 2018–2024

Sources: Serbian authorities; and IMF staff estimates and projections.

^1/Unemployment rate for working age population.

^2/Includes employer contributions.

^3/Includes amortization of called guarantees.

^4/Primary fiscal balance adjusted for the automatic effects of the output gap both on revenue and spending as well as one-offs. The calculation of the structural balance has been revised to include temporary one-off measures enacted to respond to the pandemic.

^5/Excludes state guarantees on bank loans under the credit guarantee scheme introduced in response to the COVID-19 crisis, estimated at 1.1 percent of GDP as of August 15^th, 2021.

^6/At constant exchange rates.

^7/After CR19/369, domestic securities held by non-residents are included in external debt. Historical data were updated since 2015.

^8/The risk-weighted metric is IMF’sARA metric for the fixed exchange rate. Serbia was reclassified as stabilized exchange rate regime in 2019.

^{Table 1.}

Serbia: Selected Economic and Social Indicators, 2018–2024

				2018	2019	2020	2021		2022		2023		2024
							CR 21/272	Prel.	CR 21/272	Proj.	CR 21/272	Proj.	Proj.
Real sector
	Real GDP			4.5	4.3	-0.9	6.5	7.4	4.5	3.5	4.5	4.0	4.0
	Real domestic demand (absorption)			6.5	6.3	-0.9	5.1	8.5	4.9	3.6	5.1	4.7	4.8
	Consumer prices (average)			2.0	1.9	1.6	4.0	4.1	4.9	9.0	3.5	5.9	3.7
	Consumer prices(end of period)			2.0	1.9	1.3	7.0	7.9	2.5	8.0	3.0	4.3	3.7
	GDP deflator			2.0	2.4	2.4	4.9	6.1	4.7	6.8	3.8	7.0	5.2
	Unemployment rate (in percent) 1/			14.1	11.6	10.1	...	...	...	...	...	...	...
	Nominal GDP (in billions of dinars)			5,073	5,422	5,502	6,147	6,269	6,725	6,931	7,295	7,711	8,437
General government finances
	Revenue 2/			41.5	42.0	41.0	43.6	43.3	41.7	41.3	41.7	41.6	41.7
	Expenditure 2/			40.9	42.2	49.0	48.5	47.4	44.7	44.3	43.2	43.1	42.9
			Current2/	36.4	36.9	42.8	40.3	39.0	37.0	37.5	36.2	36.2	35.9
			Capital and net lending	4.1	5.1	6.1	8.1	8.3	7.4	6.8	6.8	6.6	6.7
			Amortization of called guarantees	0.4	0.2	0.1	0.1	0.1	0.2	0.0	0.1	0.3	0.2
	Fiscal balance 3/			0.6	-0.2	-8.0	-5.0	-4.1	-3.0	-3.0	-1.5	-1.5	-1.1
	Primary fiscal balance (cash basis)			2.8	1.8	-6.0	-3.1	-2.4	-1.2	-1.3	0.3	0.8	0.6
	Structural primary fiscal balance 4/			2.9	1.5	-4.0	-3.4	-2.5	-1.7	-1.0	0.2	0.7	0.5
	Gross debt 5/			54.4	52.8	57.9	58.3	57.2	56.5	55.1	53.9	50.8	47.2
Monetary sector
	Money (M1)			20.1	16.3	36.3	11.4	14.5	9.0	11.2	8.6	11.2	8.5
	Broad money (M2)			15.0	8.8	18.4	10.6	13.0	8.4	11.8	8.1	7.3	6.0
	Domestic credit to non-government 6/			10.1	9.5	12.0	5.8	9.9	5.1	13.5	4.3	7.5	6.6
Interest rates (dinar)
	NBS key policy rate			3.1	2.3	1.0	...	1.0	...	...	...	...	...
	Interest rate on new FX and FX-indexed loans			2.8	3.1	3.0	...	3.0	...	...	...	...	...
Balance of payments
	Current account balance			-4.8	-6.9	-4.1	-4.1	-4.4	-4.3	-6.1	-4.3	-5.7	-6.0
	Exports of goods			35.2	35.7	34.4	39.1	38.9	39.2	38.7	39.0	36.7	36.0
	Imports of goods			-47.1	-47.9	-45.5	-49.5	-50.0	-49.5	-51.4	-49.3	-48.6	-47.2
	Trade of goods balance			-11.9	-12.2	-11.1	-10.4	-11.1	-10.3	-12.7	-10.3	-11.9	-11.2
	Capital and financial account balance			6.7	10.6	5.0	11.1	8.7	5.9	3.2	6.7	7.2	6.9
	External debt (percent of GDP) 7/			66.1	65.7	70.3	68.4	71.3	64.8	66.2	62.1	62.3	58.0
		of which: Private external debt		30.9	31.3	33.8	31.1	32.6	29.0	29.0	27.2	26.4	24.4
	Gross official reserves (in billions of euro)			11.3	13.4	13.5	17.1	16.5	18.0	14.7	19.5	15.7	16.4
			(in months of prospective imports)	4.8	6.1	4.9	6.0	5.3	5.9	4.4	5.9	4.4	4.3
			(percent of short-term debt)	195.3	417.2	420.7	523.2	513.1	551.4	458.9	594.8	489.5	510.5
			(percent of broad money, M2)	52.2	57.7	57.3	65.7	61.4	63.6	49.7	63.9	47.5	45.2
			(percent of risk-weighted metric)8/	111.2	126.2	125.9	139.3	134.0	138.7	114.3	142.4	113.9	112.8
	Exchange rate (dinar/euro, period average)			118.3	117.9	117.6	...	117.6	...	...	...	...	...
	REER (annual average change, in percent; + indicates appreciation)			2.8	1.0	1.5	...	1.4	...	...	...	...	...
Social indicators
	Per capita GDP (in US$)			7,252	7,397	7,700	9,012	9,178	9,940	9,597	10,904	10,883	12,145
	Real GDP per capita (percent change)			5.1	4.6	-0.4	6.9	8.3	4.9	4.0	4.9	4.4	4.4
	Population (in million)			7.0	7.0	6.9	6.9	6.9	6.9	6.8	6.8	6.8	6.8

Sources: Serbian authorities; and IMF staff estimates and projections.

^1/Unemployment rate for working age population.

^2/Includes employer contributions.

^3/Includes amortization of called guarantees.

^4/Primary fiscal balance adjusted for the automatic effects of the output gap both on revenue and spending as well as one-offs. The calculation of the structural balance has been revised to include temporary one-off measures enacted to respond to the pandemic.

^5/Excludes state guarantees on bank loans under the credit guarantee scheme introduced in response to the COVID-19 crisis, estimated at 1.1 percent of GDP as of August 15^th, 2021.

^6/At constant exchange rates.

^7/After CR19/369, domestic securities held by non-residents are included in external debt. Historical data were updated since 2015.

^8/The risk-weighted metric is IMF’sARA metric for the fixed exchange rate. Serbia was reclassified as stabilized exchange rate regime in 2019.

View Table

^{Table 1.}

Serbia: Selected Economic and Social Indicators, 2018–2024

				2018	2019	2020	2021		2022		2023		2024
							CR 21/272	Prel.	CR 21/272	Proj.	CR 21/272	Proj.	Proj.
Real sector
	Real GDP			4.5	4.3	-0.9	6.5	7.4	4.5	3.5	4.5	4.0	4.0
	Real domestic demand (absorption)			6.5	6.3	-0.9	5.1	8.5	4.9	3.6	5.1	4.7	4.8
	Consumer prices (average)			2.0	1.9	1.6	4.0	4.1	4.9	9.0	3.5	5.9	3.7
	Consumer prices(end of period)			2.0	1.9	1.3	7.0	7.9	2.5	8.0	3.0	4.3	3.7
	GDP deflator			2.0	2.4	2.4	4.9	6.1	4.7	6.8	3.8	7.0	5.2
	Unemployment rate (in percent) 1/			14.1	11.6	10.1	...	...	...	...	...	...	...
	Nominal GDP (in billions of dinars)			5,073	5,422	5,502	6,147	6,269	6,725	6,931	7,295	7,711	8,437
General government finances
	Revenue 2/			41.5	42.0	41.0	43.6	43.3	41.7	41.3	41.7	41.6	41.7
	Expenditure 2/			40.9	42.2	49.0	48.5	47.4	44.7	44.3	43.2	43.1	42.9
			Current2/	36.4	36.9	42.8	40.3	39.0	37.0	37.5	36.2	36.2	35.9
			Capital and net lending	4.1	5.1	6.1	8.1	8.3	7.4	6.8	6.8	6.6	6.7
			Amortization of called guarantees	0.4	0.2	0.1	0.1	0.1	0.2	0.0	0.1	0.3	0.2
	Fiscal balance 3/			0.6	-0.2	-8.0	-5.0	-4.1	-3.0	-3.0	-1.5	-1.5	-1.1
	Primary fiscal balance (cash basis)			2.8	1.8	-6.0	-3.1	-2.4	-1.2	-1.3	0.3	0.8	0.6
	Structural primary fiscal balance 4/			2.9	1.5	-4.0	-3.4	-2.5	-1.7	-1.0	0.2	0.7	0.5
	Gross debt 5/			54.4	52.8	57.9	58.3	57.2	56.5	55.1	53.9	50.8	47.2
Monetary sector
	Money (M1)			20.1	16.3	36.3	11.4	14.5	9.0	11.2	8.6	11.2	8.5
	Broad money (M2)			15.0	8.8	18.4	10.6	13.0	8.4	11.8	8.1	7.3	6.0
	Domestic credit to non-government 6/			10.1	9.5	12.0	5.8	9.9	5.1	13.5	4.3	7.5	6.6
Interest rates (dinar)
	NBS key policy rate			3.1	2.3	1.0	...	1.0	...	...	...	...	...
	Interest rate on new FX and FX-indexed loans			2.8	3.1	3.0	...	3.0	...	...	...	...	...
Balance of payments
	Current account balance			-4.8	-6.9	-4.1	-4.1	-4.4	-4.3	-6.1	-4.3	-5.7	-6.0
	Exports of goods			35.2	35.7	34.4	39.1	38.9	39.2	38.7	39.0	36.7	36.0
	Imports of goods			-47.1	-47.9	-45.5	-49.5	-50.0	-49.5	-51.4	-49.3	-48.6	-47.2
	Trade of goods balance			-11.9	-12.2	-11.1	-10.4	-11.1	-10.3	-12.7	-10.3	-11.9	-11.2
	Capital and financial account balance			6.7	10.6	5.0	11.1	8.7	5.9	3.2	6.7	7.2	6.9
	External debt (percent of GDP) 7/			66.1	65.7	70.3	68.4	71.3	64.8	66.2	62.1	62.3	58.0
		of which: Private external debt		30.9	31.3	33.8	31.1	32.6	29.0	29.0	27.2	26.4	24.4
	Gross official reserves (in billions of euro)			11.3	13.4	13.5	17.1	16.5	18.0	14.7	19.5	15.7	16.4
			(in months of prospective imports)	4.8	6.1	4.9	6.0	5.3	5.9	4.4	5.9	4.4	4.3
			(percent of short-term debt)	195.3	417.2	420.7	523.2	513.1	551.4	458.9	594.8	489.5	510.5
			(percent of broad money, M2)	52.2	57.7	57.3	65.7	61.4	63.6	49.7	63.9	47.5	45.2
			(percent of risk-weighted metric)8/	111.2	126.2	125.9	139.3	134.0	138.7	114.3	142.4	113.9	112.8
	Exchange rate (dinar/euro, period average)			118.3	117.9	117.6	...	117.6	...	...	...	...	...
	REER (annual average change, in percent; + indicates appreciation)			2.8	1.0	1.5	...	1.4	...	...	...	...	...
Social indicators
	Per capita GDP (in US$)			7,252	7,397	7,700	9,012	9,178	9,940	9,597	10,904	10,883	12,145
	Real GDP per capita (percent change)			5.1	4.6	-0.4	6.9	8.3	4.9	4.0	4.9	4.4	4.4
	Population (in million)			7.0	7.0	6.9	6.9	6.9	6.9	6.8	6.8	6.8	6.8

Sources: Serbian authorities; and IMF staff estimates and projections.

^1/Unemployment rate for working age population.

^2/Includes employer contributions.

^3/Includes amortization of called guarantees.

^4/Primary fiscal balance adjusted for the automatic effects of the output gap both on revenue and spending as well as one-offs. The calculation of the structural balance has been revised to include temporary one-off measures enacted to respond to the pandemic.

^5/Excludes state guarantees on bank loans under the credit guarantee scheme introduced in response to the COVID-19 crisis, estimated at 1.1 percent of GDP as of August 15^th, 2021.

^6/At constant exchange rates.

^7/After CR19/369, domestic securities held by non-residents are included in external debt. Historical data were updated since 2015.

^8/The risk-weighted metric is IMF’sARA metric for the fixed exchange rate. Serbia was reclassified as stabilized exchange rate regime in 2019.

Title page

REPUBLIC OF SERBIA

SECOND REVIEW UNDER THE POLICY COORDINATION INSTRUMENT AND REQUEST FOR MODIFICATION OF TARGETS

June 7, 2022

EXECUTIVE SUMMARY

Recent Developments, Outlook, and Risks. The economy has navigated the COVID-19 pandemic well. In 2021, real GDP growth strongly rebounded by 7.4 percent, supporting a narrower fiscal deficit of 4.1 percent of GDP and a decline in the public debt ratio, and consistent with a return to pre-pandemic medium-term trend growth.

The war in Ukraine is weighing on growth and increasing inflationary pressures amid high uncertainty. Lower growth in trading partners and higher global commodity prices are projected to curtail real GDP growth to 3.5 percent in 2022. Driven by rising food and global energy prices, inflation reached 9.6 percent in April 2022 while core inflation remained lower at 5.5 percent.

Near-term risks are mostly to the downside and include more prolonged or severe spillovers from the war in Ukraine, rising energy prices, energy supply disruptions, more severe trade disruptions, and lower global demand. Serbia’s medium-term outlook, while uncertain, remains favorable, supported by the authorities’ commitment to structural reforms.

Program Performance. Macro-financial stability has been maintained notwithstanding the various shocks. All but one end-December 2021 quantitative targets (QTs) were met. The ceiling on current primary expenditure was missed when additional fiscal spending was needed to ensure energy security. While the March 2022 inflation level triggered the consultation clause under the program, monetary policy has been tightened appropriately since October 2021. Staff recommends completion of the second review under the Policy Coordination Instrument (PCI).

Policy Recommendations. Immediate policy priorities are to preserve macro-fiscal and financial stability and mitigate the impact of the war in Ukraine.

• Fiscal Policy. The 3 percent deficit target for 2022 remains appropriate and achievable. Should economic disruptions warrant further support to the affected groups or activities, including the state-owned enterprises (SOEs) in the energy sector, the additional expenditures should be accommodated by reprioritizing the budgeted current and capital spending. Any additional emergency assistance should be temporary and targeted to vulnerable households and viable firms. Financial support to the SOEs should be delivered in a transparent manner.

• Monetary and Financial Policies. The authorities have tightened monetary conditions, including by increasing the policy rate both in April and May by 50 bps each to 2.0 percent. They should stand ready to tighten monetary policy further as needed to curb inflation expectations and help ensure the return of projected inflation within the target band byend-2023. The banking system remains well-capitalized and liquid, but continued vigilance is essential to safeguard financial stability, as was shown with the decisive NBS action to resolve Sberbank Srbija in late February.

• Structural Reforms. The recent energy supply challenges underscored the need for rigorous governance reforms in the main energy companies and a new investment strategy. Forthcoming energy tariff adjustments will need to help ensure cost recovery and financial sustainability of the energy companies while safeguarding vulnerable households and avoiding pressure on the government budget. The planned new fiscal rules framework should be designed to provide clear and credible signals about the government’s fiscal commitments and fiscal sustainability. Once a new government is in place, the manifold planned structural reforms should be reinvigorated for continued strong, sustainable and inclusive growth.

Approved By

Laura Papi (EUR) Maria Gonzalez (SPR)

Contents

• RECENT DEVELOPMENTS

• OUTLOOK AND RISKS

• PROGRAM AND POLICY DISCUSSIONS

• A Energy Challenges

• B. Fiscal Policy

• C. Monetary and Financial Sector Policies

• D. Structural Policies

• PROGRAM MODALITIES

• STAFF APPRAISAL

• FIGURES

• 1. COVID-19 Evolution in Serbia

• 2. Real Sector Developments

• 3. Balance of Payments and NIR

• 4. Financial and Exchange Rate Developments

• 5. Inflation and Monetary Policy

• 6. Selected Interest Rates and Credit Development

• 7. Fiscal Developments

• 8. Labor Market Developments

• TABLES

• 1. Selected Economic and Social Indicators, 2018–24

• 2. Medium-Term Framework, 2018–27

• 3. Growth Composition, 2018–27

• 4a. Balance of Payments, 2018–27^/1

• 4b. Balance of Payments, 2018–27^/1

• 5. External Financing Requirements and Sources, 2018–27

• 6a. General Government Fiscal Operations, 2018–27

• 6b. General Government Fiscal Operations, 2018–27

• 7. Decomposition of Public Debt Service by Creditor, 2021–23

• 8. Monetary Survey, 2018–27

• 9. NBS Balance Sheet, 2018–27

• 10. Banking Sector Financial Soundness Indicators, 2016–22

• 11. Schedule of Reviews Under the Policy Coordination Instrument, 2021–23

• ANNEXES

• I. Serbia’s Energy Challenges

• II. War in Ukraine—Spillover Channels to Serbia

• III. Risk Assessment Matrix

• IV. External Sector Assessment

• V. Debt Sustainability Analysis

• APPENDIX

• I. Program Statement

  • Attachment: I. Technical Memorandum of Understanding