Abstract
IMF Country Report No. 22/384
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IMF Country Report No. 22/384
REPUBLIC OF SERBIA
THIRD REVIEW UNDER THE POLICY COORDINATION INSTRUMENT, REQUEST FOR A STAND-BY ARRANGEMENT, AND CANCELLATION OF THE POLICY COORDINATION INSTRUMENT—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE REPUBLIC OF SERBIA
December 2022
In the context of the Third Review Under the Policy Coordination Instrument, Request for a Stand-By Arrangement, and Cancellation of the Policy Coordination Instrument, 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 December 19, 2022, following discussions that ended on November 2, 2022, with the officials of Republic of Serbia on economic developments, the policies pursued under the Policy Coordination Instrument, and policies underpinning the Stand-By Arrangement. Based on information available at the time of these discussions, the staff report was completed on December 2, 2022.
A Statement by the Executive Director for the 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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Press Release
PRESS RELEASE
PR 22/447
IMF Executive Board Approves a 2.4 billion EUR Stand-by Arrangement for the Republic of Serbia
FOR IMMEDIATE RELEASE
The IMF approved yesterday a two-year Stand-by Arrangement (SBA) for the Republic of Serbia amounting to about SDR 1.89 billion, or approximately 2.4 billion EUR. The SBA will replace the existing Policy Coordination Instrument (PCI) and build on the PCI reform agenda with appropriate modifications for recent policy challenges.
In the context of the energy crisis, the SBA focuses on addressing external and fiscal financing needs, maintaining macroeconomic and financial stability, and continuing to strengthen the economy’s performance and resilience through structural reforms, especially in the energy sector.
The authorities intend to make the first three purchases that become available under the SBA in 2022 and 2023 and treat the remainder as precautionary.
The IMF also concluded the 3rd Review of the existing PCI, which is cancelled upon approval of the SBA.
Washington, DC – December 20, 2022: The Executive Board of the International Monetary Fund (IMF) approved a EUR 2.4 billion (or the equivalent of 290 percent of quota and SDR 1.89892 billion) SBA yesterday for the Republic of Serbia. The SBA provides support for the authorities’ economic policies over the next two years. The Board’s decision makes approximately EUR 1 billion (120 percent of quota and SDR 785.76 million) available immediately, which the authorities intend to purchase. Future purchases become available upon completion of semi-annual reviews. The authorities intend to make further purchases in 2023, while treating the 2024 amounts as precautionary.
The Executive Board of the IMF also concluded the third review under the PCI1 for the Republic of Serbia. The PCI was approved on June 18, 2021 and aimed at: supporting the recovery from the Covid 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 SBA will replace the existing PCI and build on the PCI reform agenda with appropriate modifications for recent policy challenges.
The authorities’ program supported by the SBA takes forward the policies already pursued under the PCI, while incorporating additional actions to address the energy crisis and increase buffers amidst high uncertainty. Policies seek to address actual and potential external and fiscal financing needs, maintain macroeconomic and financial stability, and continue to strengthen the economy’s performance and resilience through structural reforms, with a special focus on the energy sector.
At the conclusion of the Board discussion on the Republic of Serbia, Mrs. Gita Gopinath, First Deputy Managing Director, made the following statement:
“Serbia has built a strong track record of solid macroeconomic performance, supported by the IMF under the Policy Coordination Instrument (PCI). However, with high energy prices, a longer timeline to fully restore domestic electricity production, high inflation, and lower trading partner growth, the current account and the outlook for economic growth have weakened while additional fiscal financing needs have emerged. The authorities have preserved macro-financial stability and have already put policies in place to mitigate these shocks. Amid high uncertainty, they seek to build additional buffers supported by a Stand-by Arrangement.
Taking forward the policies under the PCI, the authorities are rightly containing the fiscal deficit while providing temporary support to the state-owned energy companies. Gradually raising Serbia’s comparatively low domestic energy tariffs while protecting the most vulnerable will be important for restoring cost recovery over the medium term, eliminating the fiscal drain, and encouraging energy conservation. The new fiscal rules will provide an important anchor for medium-term fiscal discipline.
Reforms of the energy sector are a high priority. The planned reform strategy for power company EPS, a prioritized sectoral investment plan, and a new Energy Development Strategy will help guide these reforms in both the public and the private sectors.
Amid ongoing global and domestic inflationary pressures, monetary policy has rightly continued to be tightened. The National Bank of Serbia’s vigilance in ensuring price stability will be key to curbing inflation expectations and bringing inflation back within the inflation band.
Additional structural reform commitments, including on fiscal management and governance of state-owned enterprises, aimed at underpinning medium-term growth are also important.”
Annex
Recent Economic Developments
Serbia’s economy rebounded quickly from the Covid pandemic, and the authorities embarked on a well-paced consolidation path to rebuild buffers, supported by a program under the PCI. However, risks foreshadowed at the Second Review of the PCI have materialized: higher energy prices and domestic electricity production problems have significantly increased balance of payments and fiscal financing needs. And high global inflation, a weak outlook for trading partner growth, and ongoing spillovers from Russia’s war in Ukraine weigh on the outlook despite its still-strong macroeconomic policies.
Program Summary
The two-year SBA would help cover the external and fiscal financing needs through the coming winter stemming from elevated energy import costs and worsening global financing conditions, and maintain external buffers in an environment of high risks. Some policies include:
Energy tariff adjustments and structural reforms to restore the financial balances of the state-owned energy utilities EPS and Srbijagas within two years, while cushioning the impact on vulnerable households and supporting the energy utilities through fiscal transfers in the short term;
Tight monetary and fiscal policies to control inflation and provide support for the stabilized exchange rate;
Further fiscal transparency and budget reforms to support fiscal discipline and the effective implementation of the new fiscal rule; and
Ongoing reforms to strengthen SOE governance and oversight.
Serbia: Selected Economic and Social Indicators, 2019–2024
Unemployment rate of the 15+ labor force.
Includes employer contributions.
Includes amortization of called guarantees.
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 to respond to the pandemic and to the energy crisis.
Excludes state guarantees on bank loans under the credit guarantee scheme introduced in response to the COVID-19 crisis.
At constant exchange rates.
The risk-weighted metric is IMF’s ARA metric under fixed exchange rate. Serbia was reclassified as stabilized exchange rate regime in 2019.
Serbia: Selected Economic and Social Indicators, 2019–2024
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | ||||
| CR 22/201 | Proj. | CR 22/201 |
Proj. | CR 22/201 |
Proj. | ||||
| (Percent change, unless otherwise indicated) | |||||||||
| Real sector | |||||||||
| Real GDP | 4.3 | -0.9 | 7.5 | 3.5 | 2.5 | 4.0 | 2.3 | 4.0 | 3.0 |
| Consumer prices (average) | 1.9 | 1.6 | 4.1 | 9.0 | 12.1 | 5.9 | 12.2 | 3.7 | 5.3 |
| Consumer prices (end of period) | 1.9 | 1.3 | 7.9 | 8.0 | 15.8 | 4.3 | 8.2 | 3.7 | 4.0 |
| GDP deflator | 2.4 | 2.4 | 5.9 | 6.8 | 10.3 | 7.0 | 10.7 | 5.2 | 6.7 |
| Unemployment rate (in percent) 1/ | 11.2 | 9.7 | 11.0 | … | 10.5 | … | 11.1 | … | 10.6 |
| Nominal GDP (in billions of dinars) | 5,422 | 5,504 | 6,270 | 6,931 | 7,088 | 7,711 | 8,026 | 8,437 | 8,821 |
| General government finances | (Percent of GDP) | ||||||||
| Revenue 2/ | 42.0 | 41.0 | 43.3 | 41.3 | 43.0 | 41.6 | 41.6 | 41.7 | 41.6 |
| Expenditure 2/ | 42.2 | 49.0 | 47.4 | 44.3 | 46.8 | 43.1 | 44.9 | 42.9 | 43.8 |
| Current 2/ | 36.9 | 42.7 | 39.0 | 37.5 | 37.1 | 36.2 | 36.1 | 35.9 | 36.0 |
| Capital and net lending | 5.1 | 6.1 | 8.3 | 6.8 | 9.4 | 6.6 | 8.4 | 6.7 | 7.5 |
| Amortization of called guarantees | 0.2 | 0.1 | 0.1 | 0.0 | 0.3 | 0.3 | 0.3 | 0.2 | 0.3 |
| Fiscal balance 3/ | -0.2 | -8.0 | -4.1 | -3.0 | -3.8 | -1.5 | -3.3 | -1.1 | -2.2 |
| Primary fiscal balance (cash basis) | 1.8 | -6.0 | -2.4 | -1.3 | -2.2 | 0.8 | -1.5 | 0.6 | -0.4 |
| Structural primary fiscal balance 4/ | 1.5 | -4.1 | -2.5 | -1.0 | -0.6 | 0.7 | 0.4 | 0.5 | 0.7 |
| Gross debt /5 | 52.8 | 57.8 | 57.1 | 55.1 | 56.8 | 50.8 | 56.4 | 47.2 | 53.2 |
| (End of period 12-month change, percent) | |||||||||
| Monetary sector | |||||||||
| Broad money (M2) | 8.8 | 18.4 | 13.0 | 11.8 | 3.3 | 7.3 | 7.9 | 6.0 | 10.9 |
| Domestic credit to non-government 6/ | 9.5 | 12.0 | 9.9 | 13.5 | 10.3 | 7.5 | 7.7 | 6.6 | 10.5 |
| (Period average, percent) | |||||||||
| Interest rates (dinar) | |||||||||
| NBS key policy rate | 2.3 | 1.0 | 1.0 | … | … | … | … | … | |
| Interest rate on new FX and FX-indexed loans | 3.1 | 3.0 | 2.5 | … | … | … | … | … | |
| (Percent of GDP, unless otherwise indicated) | |||||||||
| Balance of payments | |||||||||
| Current account balance | -6.9 | -4.1 | -4.3 | -6.1 | -9.0 | -5.7 | -8.4 | -6.0 | -6.0 |
| Trade of goods balance | -12.2 | -11.1 | -11.1 | -12.7 | -14.8 | -11.9 | -13.1 | -11.2 | -10.3 |
| Exports of goods | 35.7 | 34.3 | 39.0 | 38.7 | 42.8 | 36.7 | 43.2 | 36.0 | 42.5 |
| Imports of goods | -47.9 | -45.5 | -50.1 | -51.4 | -57.6 | -48.6 | -56.3 | -47.2 | -52.8 |
| Capital and financial account balance | 10.6 | 5.0 | 8.9 | 3.2 | 7.0 | 7.2 | 7.3 | 6.9 | 6.7 |
| External debt (percent of GDP) | 65.7 | 70.3 | 71.3 | 66.2 | 68.0 | 62.3 | 65.4 | 58.0 | 61.5 |
| of which: Private external debt Gross official reserves | 31.3 | 33.8 | 32.6 | 29.0 | 29.4 | 26.4 | 26.8 | 24.4 | 25.1 |
| (in billions of euro) | 13.4 | 13.5 | 16.5 | 14.7 | 16.3 | 15.7 | 16.6 | 16.4 | 17.6 |
| (in months of prospective imports) | 6.1 | 4.9 | 4.6 | 4.4 | 4.1 | 4.4 | 4.1 | 4.3 | 4.1 |
| (percent of risk-weighted metric) 7/ | 125.0 | 121.9 | 131.5 | 114.3 | 118.9 | 113.9 | 111.8 | 112.8 | 110.4 |
| Exchange rate (dinar/euro, period average) | 117.9 | 117.6 | 117.6 | … | … | … | … | … | … |
| REER (annual average change, in percent, + indicates appreciation) | 1.0 | 1.5 | 1.4 | … | … | … | … | … | … |
| Social indicators | |||||||||
| Per capita GDP (in US$) | 7,397 | 7,703 | 9,180 | 9,597 | 9,309 | 10,883 | 10,203 | 12,145 | 11,222 |
| Population (in million) | 7.0 | 6.9 | 6.9 | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 |
Unemployment rate of the 15+ labor force.
Includes employer contributions.
Includes amortization of called guarantees.
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 to respond to the pandemic and to the energy crisis.
Excludes state guarantees on bank loans under the credit guarantee scheme introduced in response to the COVID-19 crisis.
At constant exchange rates.
The risk-weighted metric is IMF’s ARA metric under fixed exchange rate. Serbia was reclassified as stabilized exchange rate regime in 2019.
Serbia: Selected Economic and Social Indicators, 2019–2024
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | ||||
| CR 22/201 | Proj. | CR 22/201 |
Proj. | CR 22/201 |
Proj. | ||||
| (Percent change, unless otherwise indicated) | |||||||||
| Real sector | |||||||||
| Real GDP | 4.3 | -0.9 | 7.5 | 3.5 | 2.5 | 4.0 | 2.3 | 4.0 | 3.0 |
| Consumer prices (average) | 1.9 | 1.6 | 4.1 | 9.0 | 12.1 | 5.9 | 12.2 | 3.7 | 5.3 |
| Consumer prices (end of period) | 1.9 | 1.3 | 7.9 | 8.0 | 15.8 | 4.3 | 8.2 | 3.7 | 4.0 |
| GDP deflator | 2.4 | 2.4 | 5.9 | 6.8 | 10.3 | 7.0 | 10.7 | 5.2 | 6.7 |
| Unemployment rate (in percent) 1/ | 11.2 | 9.7 | 11.0 | … | 10.5 | … | 11.1 | … | 10.6 |
| Nominal GDP (in billions of dinars) | 5,422 | 5,504 | 6,270 | 6,931 | 7,088 | 7,711 | 8,026 | 8,437 | 8,821 |
| General government finances | (Percent of GDP) | ||||||||
| Revenue 2/ | 42.0 | 41.0 | 43.3 | 41.3 | 43.0 | 41.6 | 41.6 | 41.7 | 41.6 |
| Expenditure 2/ | 42.2 | 49.0 | 47.4 | 44.3 | 46.8 | 43.1 | 44.9 | 42.9 | 43.8 |
| Current 2/ | 36.9 | 42.7 | 39.0 | 37.5 | 37.1 | 36.2 | 36.1 | 35.9 | 36.0 |
| Capital and net lending | 5.1 | 6.1 | 8.3 | 6.8 | 9.4 | 6.6 | 8.4 | 6.7 | 7.5 |
| Amortization of called guarantees | 0.2 | 0.1 | 0.1 | 0.0 | 0.3 | 0.3 | 0.3 | 0.2 | 0.3 |
| Fiscal balance 3/ | -0.2 | -8.0 | -4.1 | -3.0 | -3.8 | -1.5 | -3.3 | -1.1 | -2.2 |
| Primary fiscal balance (cash basis) | 1.8 | -6.0 | -2.4 | -1.3 | -2.2 | 0.8 | -1.5 | 0.6 | -0.4 |
| Structural primary fiscal balance 4/ | 1.5 | -4.1 | -2.5 | -1.0 | -0.6 | 0.7 | 0.4 | 0.5 | 0.7 |
| Gross debt /5 | 52.8 | 57.8 | 57.1 | 55.1 | 56.8 | 50.8 | 56.4 | 47.2 | 53.2 |
| (End of period 12-month change, percent) | |||||||||
| Monetary sector | |||||||||
| Broad money (M2) | 8.8 | 18.4 | 13.0 | 11.8 | 3.3 | 7.3 | 7.9 | 6.0 | 10.9 |
| Domestic credit to non-government 6/ | 9.5 | 12.0 | 9.9 | 13.5 | 10.3 | 7.5 | 7.7 | 6.6 | 10.5 |
| (Period average, percent) | |||||||||
| Interest rates (dinar) | |||||||||
| NBS key policy rate | 2.3 | 1.0 | 1.0 | … | … | … | … | … | |
| Interest rate on new FX and FX-indexed loans | 3.1 | 3.0 | 2.5 | … | … | … | … | … | |
| (Percent of GDP, unless otherwise indicated) | |||||||||
| Balance of payments | |||||||||
| Current account balance | -6.9 | -4.1 | -4.3 | -6.1 | -9.0 | -5.7 | -8.4 | -6.0 | -6.0 |
| Trade of goods balance | -12.2 | -11.1 | -11.1 | -12.7 | -14.8 | -11.9 | -13.1 | -11.2 | -10.3 |
| Exports of goods | 35.7 | 34.3 | 39.0 | 38.7 | 42.8 | 36.7 | 43.2 | 36.0 | 42.5 |
| Imports of goods | -47.9 | -45.5 | -50.1 | -51.4 | -57.6 | -48.6 | -56.3 | -47.2 | -52.8 |
| Capital and financial account balance | 10.6 | 5.0 | 8.9 | 3.2 | 7.0 | 7.2 | 7.3 | 6.9 | 6.7 |
| External debt (percent of GDP) | 65.7 | 70.3 | 71.3 | 66.2 | 68.0 | 62.3 | 65.4 | 58.0 | 61.5 |
| of which: Private external debt Gross official reserves | 31.3 | 33.8 | 32.6 | 29.0 | 29.4 | 26.4 | 26.8 | 24.4 | 25.1 |
| (in billions of euro) | 13.4 | 13.5 | 16.5 | 14.7 | 16.3 | 15.7 | 16.6 | 16.4 | 17.6 |
| (in months of prospective imports) | 6.1 | 4.9 | 4.6 | 4.4 | 4.1 | 4.4 | 4.1 | 4.3 | 4.1 |
| (percent of risk-weighted metric) 7/ | 125.0 | 121.9 | 131.5 | 114.3 | 118.9 | 113.9 | 111.8 | 112.8 | 110.4 |
| Exchange rate (dinar/euro, period average) | 117.9 | 117.6 | 117.6 | … | … | … | … | … | … |
| REER (annual average change, in percent, + indicates appreciation) | 1.0 | 1.5 | 1.4 | … | … | … | … | … | … |
| Social indicators | |||||||||
| Per capita GDP (in US$) | 7,397 | 7,703 | 9,180 | 9,597 | 9,309 | 10,883 | 10,203 | 12,145 | 11,222 |
| Population (in million) | 7.0 | 6.9 | 6.9 | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 |
Unemployment rate of the 15+ labor force.
Includes employer contributions.
Includes amortization of called guarantees.
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 to respond to the pandemic and to the energy crisis.
Excludes state guarantees on bank loans under the credit guarantee scheme introduced in response to the COVID-19 crisis.
At constant exchange rates.
The risk-weighted metric is IMF’s ARA metric under fixed exchange rate. Serbia was reclassified as stabilized exchange rate regime in 2019.
Title Page
REPUBLIC OF SERBIA
THIRD REVIEW UNDER THE POLICY COORDINATION INSTRUMENT, REQUEST FOR A STAND-BY ARRANGEMENT, AND CANCELLATION OF THE POLICY COORDINATION INSTRUMENT
December 2, 2022
EXECUTIVE SUMMARY
Context. Serbia’s economy rebounded quickly from the Covid pandemic and the authorities embarked on a well-paced consolidation path to rebuild buffers, supported by a program under the Policy Coordination Instrument (PCI). However, risks foreshadowed at the Second Review of the PCI have materialized: higher energy prices and domestic electricity production problems have significantly increased balance of payments and fiscal financing needs. And high global inflation, a weak outlook for trading partner growth, and ongoing spillovers from Russia’s war in Ukraine weigh on the outlook despite its still-strong macroeconomic policies.
Stand-By Arrangement (SBA). The authorities have requested support under a two-year SBA (SDR 1,898.92 million, 290 percent of quota, about EUR 2.4 billion) to help address these challenges. In the attached letter, they describe their economic and financial policies to address external and fiscal financing needs, maintain macroeconomic and financial stability, and continue to strengthen the economy’s performance and resilience through structural reforms. Key policies include:
Energy tariff adjustments and structural reforms to restore the financial balances of the state-owned energy utilities EPS and Srbijagas within two years, while cushioning the impact on vulnerable households and supporting the energy utilities through fiscal transfers in the short term;
Tight monetary and fiscal policies to control inflation and provide support for the stabilized exchange rate;
Further fiscal transparency and budget reforms to support fiscal discipline and the effective implementation of the new fiscal rule; and
Ongoing reforms to strengthen SOE governance and oversight.
PCI. Policies under the SBA build on policies under the PCI, which the authorities cancel on approval of the SBA. Macro-financial stability has been maintained notwithstanding the challenging environment, and all-but-one reform targets have been implemented, albeit with some delays. As the SBA includes appropriate additional and remedial actions to address the latest challenges, staff recommends completion of the Third Review under the PCI.
Approved By
Laura Papi (EUR) Maria Gonzalez (SPR)
Discussions were held in Belgrade in person during October 20– November 2, 2022. The staff team comprised Jan Kees Martijn (head), Donal McGettigan (incoming mission chief), Larry Cui, Christiane Roehler (all EUR), Hamid Davoodi (FAD), Lukas Kohler (SPR), Priscilla Toffano (MCM), Yulia Ustyugova (resident representative), and Marko Paunović (local economist). Vuk Djoković (OED) attended some meetings. Support was provided by Nisha Samuel and Zeju Zhu (both EUR), and by Zvezdana Marjanović (local office).
Contents
CONTEXT
ECONOMIC DEVELOPMENTS AND CHALLENGES
PERFORMANCE UNDER THE PCI
THE STAND-BY ARRANGEMENT
A. Overview
B. Macroeconomic Framework
C. Energy Sector Policies
D. Fiscal Policies
E. Monetary and Financial Sector Policies
F. Structural Reforms
PROGRAM MODALITIES
A. Duration, Access, and Financing Assurances
B. Capacity to Repay the Fund and Risks to the Program
C. Program Monitoring, Conditionality and Safeguards Assessment
STAFF APPRAISAL
FIGURES
1. COVID-19 Evolution
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, 2019–2027
2. Medium-Term Framework, 2019–2027
3. Growth Composition, 2019–2027
4a. Balance of Payments, 2019–2027 (Billions of euros)
4b. Balance of Payments, 2019–2027 (Percent of GDP)
5a. External Financing Requirements and Sources (Baseline), 2019–2027
5b. Indicators of Capacity to Repay the Fund (Baseline), 2020–2027
6a. General Government Fiscal Operations, 2019–2027 (Billions of RSD)
6b. General Government Fiscal Operation, 2019–2027 (Percent of GDP)
7. Decomposition of Public Debt and Debt Service by Creditor, 2019–2023
8. Monetary Survey, 2019–2027
9. NBS Balance Sheet, 2019–2027
10. Banking Sector Financial Soundness Indicators, 2016–2022
11a. Schedule of Reviews Under the PCI (for Cancellation), 2021–2023
11b. Proposed Schedule of Reviews and Purchases Under the 2-year SBA Arrangement, 2022– 2024
ANNEXES
I. Risk Assessment Matrix
II. Performance Under Previous Fund Arrangements
III. Fiscal Rules
IV. Adverse Scenario
V. Sovereign Risk and Debt Sustainability Analysis
VI. Serbia’s Energy Sector Challenges
APPENDIX
I. Letter of Intent
Attachment I. Memorandum of Economic and Financial Policies
Attachment II. Technical Memorandum of Understanding
The PCI is available to all IMF members that do not need Fund financial resources at the time of approval. It is designed for countries seeking to demonstrate commitment to a reform agenda or to unlock and coordinate financing from other official creditors or private investors
