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

1. Supported by sound macroeconomic fundamentals and its policy program under the PCI, Serbia grew rapidly following the Covid-19 pandemic and rebuilt its buffers. Before the pandemic, Serbia experienced several years of strong growth, increased employment, and low inflation. The fiscal deficit was contained, and public debt declined. Robust and diversified FDI more than financed the current account deficit. Supported by a comprehensive package of fiscal, monetary and financial sector measures, real GDP growth in 2020 contracted less than in most countries in Europe, and rebounded strongly over 2021–2022:H1. Fiscal consolidation since 2021 put the fiscal deficit and public debt back on a downward path.


1. Supported by sound macroeconomic fundamentals and its policy program under the PCI, Serbia grew rapidly following the Covid-19 pandemic and rebuilt its buffers. Before the pandemic, Serbia experienced several years of strong growth, increased employment, and low inflation. The fiscal deficit was contained, and public debt declined. Robust and diversified FDI more than financed the current account deficit. Supported by a comprehensive package of fiscal, monetary and financial sector measures, real GDP growth in 2020 contracted less than in most countries in Europe, and rebounded strongly over 2021–2022:H1. Fiscal consolidation since 2021 put the fiscal deficit and public debt back on a downward path.


1. Supported by sound macroeconomic fundamentals and its policy program under the PCI, Serbia grew rapidly following the Covid-19 pandemic and rebuilt its buffers. Before the pandemic, Serbia experienced several years of strong growth, increased employment, and low inflation. The fiscal deficit was contained, and public debt declined. Robust and diversified FDI more than financed the current account deficit. Supported by a comprehensive package of fiscal, monetary and financial sector measures, real GDP growth in 2020 contracted less than in most countries in Europe, and rebounded strongly over 2021–2022:H1. Fiscal consolidation since 2021 put the fiscal deficit and public debt back on a downward path.

Text Figure 1.
Text Figure 1.

Serbia: Macroeconomic Trends, 2017–2021

Citation: IMF Staff Country Reports 2022, 384; 10.5089/9798400228803.002.A001

2. Serbia, however, now is facing a confluence of adverse global, regional, and domestic developments, adding to external and fiscal pressures. Production problems in the domestic energy sector, combined with rising international prices of gas and electricity, raised import costs during the 2021–22 winter. The near-term outlook is significantly weaker than at the time of the 2nd review of the PCI, reflecting (1) weaker global and regional growth, (2) monetary policy tightening by key central banks, making external financing by EMs more challenging and expensive, and (3) the materialization of downside risks, including a prolonged war in Ukraine, still-high food and energy prices, and a longer timeframe for fully restoring domestic electricity production. A second year of drought aggravates the situation: hydro power generation declined, low water levels in the Danube delayed shipping of bulk goods including oil and coal, and high prices for fruit and vegetables are contributing to food inflation.

3. Against this backdrop, the authorities have requested support under an SBA and, on approval, cancel the PCI. The proposed 2-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. The policy program would build on reform priorities under the PCI with additional urgent measures to overcome the energy crisis. The new government that took office in early November, based on elections in April, has indicated that resolving the energy crisis will be its main priority.

Economic Developments and Challenges

4. Serbia’s growth has started to soften. While real GDP growth remained strong in the first half of the year, at 4.0 percent yoy, it slowed to 1.0 percent yoy in 2022:Q3, with declines in agriculture, industry, and construction, broadly in line with high frequency indicators.

5. Inflation has continued to increase despite ongoing monetary policy tightening. The NBS has increased its key policy rate seven times since April 2022 to 4.5 percent. Despite these welcome moves, and consistent with inflation pressures elsewhere, inflation increased to 15 percent in October 2022, while core inflation remained lower at 9.5 percent.

Serbia: Real Growth Indicators, 2021 - 2022 (yoy)

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Source: Statistical Office of Serbia (SORS)

For 2022, staff calculations based on SORS' November provisional quarterly estimates fo r 2022:Q1 -Q3.

6. The energy import bill looks set to double in 2022, and is expected to remain elevated in 2023–24. Through September 2022, the energy import bill was EUR 4.3 billion (7.2 percent of GDP) nearly doubling last year’s. This reflects adverse developments across the electricity, gas, and oil sectors.

  • Electricity. Serbia needs to import electricity through the 2022–23 winter and coal for power production over the coming 3 years. The state-owned power utility Elektroprivreda Srbije (EPS) has normally been self-sufficient in electricity generation, mostly from coal and from hydro power (25–30 percent), but shortfalls that arose in 2021 still persist because of low, drought-related water levels and delays in restoring domestic coal production, coinciding with record-high electricity and coal prices (Text Figure 2). The aged thermal power plants also remain at risk of failures.

  • Natural gas. With almost no domestic production, the state-owned gas utility, Srbijagas, purchases two-thirds of Serbia’s current annual needs under a favorable oil-indexed import contract for Russian gas, and the remainder on the open market. With escalating regional market prices, the import bill through September nearly quadrupled compared with last year. To prepare for the 2022–23 winter, gas storage was expanded. At end-September Srbijagas had stored sufficient gas domestically and in newly-purchased capacity in Hungary to cover between 7-9 weeks of winter consumption. The stored gas enhances supply security, and helps guard against future prices spikes, but was purchased at high prices.

  • Oil. Oil price hikes since mid-2021 have increased the import costs of Serbia’s refinery, which on net supplies most of Serbia’s refined mineral products.

Text Figure 2.
Text Figure 2.

Regional Energy Import Prices, 2021–2022 1/

Citation: IMF Staff Country Reports 2022, 384; 10.5089/9798400228803.002.A001

1/ Serbia’s energy imports mainly follow European prices. It also imports coals from Indonesia.

7. Reflecting the higher energy import bill, the fiscal and external deficits are increasing. The fiscal impact arises from limited pass-through of the higher energy import prices to domestic prices. Household energy prices are regulated, and many corporate contracts are covered by price caps and fixed for one year. Consequently, in the short term, revenues of EPS and Srbijagas have adjusted only modestly, and the government has provided subsidies, loans and guarantees to support both companies (2.2 percent of annual GDP by September 2022). The current account deficit is expected to widen to approximately 9 percent of GDP in 2022 from 4.3 percent in the prior year, largely due to higher energy imports. While the June 2022 External Stability Assessment for the second review under the PCI indicated that the external position at end-2021 was broadly in line with fundamentals, ongoing developments suggest that the situation may be weakening in 2022, and this will be assessed in the context of the forthcoming Article IV Consultation.

8. Access to international financial markets is constrained and government borrowing costs have increased. While Serbia’s credit rating has remained stable at one notch below investment grade, and nonresident investments in domestic bonds stabilized in 2022, prospects for market access remain uncertain under current market conditions. Serbia’s international secondary market spread has increased sharply since the start of the war in Ukraine. Moreover, rates for longer-term (10-year) domestic RSD-bonds have also risen, to more than 7 percent, displaying the same steep yield curve of expected real interest rates as regional peers.

Performance Under the PCI

9. Serbia has a strong record of on-track program performance under the PCI and the prior SBA. Macroeconomic achievements included fiscal consolidation and strong growth performance (Text Figure 1). Structural reforms included resolution of NPLs, reforms in state-owned enterprises (SOEs), privatization and restructuring of state-owned banks, a new fiscal rule, and tax administration reforms (Annex II).

10. Even though recent quantitative (QT) and reform targets (RTs) were missed, this was mainly due to exogenous factors (MEFP Tables 1a and 2a).

  • The June 2022 QT on the fiscal deficit was met, while the June 2022 QT on central government (nominal) primary current expenditure was missed by 1.1 percent of GDP, reflecting inflation pressures. In light of high inflation, the authorities approved additional expenditure to mitigate the high cost of living (e.g., a one-off pension payment, reduced excise taxes on gasoline and diesel, and subsidies to support fixed prices of a few basic commodities) without undermining fiscal sustainability.

  • The upper limit of the inflation consultation band at end-June and end-September was breached, reflecting continued high global inflation and drought-related high local food inflation. The authorities have consulted with staff, who consider the monetary response, including progressive increases in the key policy rate, as appropriate.

  • All RTs to end-December 2022 have been or are expected to be completed, albeit with delay. A tender for a new tax administration IT system (end-June 2022 RT) was launched in October after revisions reflecting updated advice from consultants. Legislation on a fiscal rule to help anchor fiscal discipline in a robust medium-term fiscal policy framework (end-October 2022 RT) was approved in November after the new government had been elected and is before parliament. A new law that aims to strengthen SOE management (end-December 2022 RT, reset as SBA structural benchmark (SB)) has been published for public discussion. While changes of the legal status of EPS to a joint stock company (end-November 2022 RT, reset as end-February 2023 SBA SB) have been prepared, their formal adoption has been delayed due to the long period without a regular government.

The Stand-by Arrangement

A. Overview

11. The proposed SBA succeeds the PCI, takes its reforms forward, and aims to address Serbia’s external and fiscal financing needs, preserve macroeconomic and financial stability, and further strengthen economic performance and resilience.

  • While options to mitigate high global energy prices are limited, cost-recovery for EPS and Srbijagas is planned during the program. The program involves raising energy tariffs to offset the expected permanent component of the increased energy import costs, while the temporary component is covered by fiscal support. Beyond containing the drain on the budget, tariff increases encourage needed energy savings. The program also tackles long-standing structural weaknesses in the domestic energy sector.

  • Appropriately tight monetary and fiscal policies will be key to containing the current account deficit and controlling inflation. These policies will also support the stabilized exchange rate, which the authorities continue to see as essential for macroeconomic stability, especially under current challenges.

  • Structural reforms to enhance growth and resilience focus on improving the management of SOEs to bolster efficiency, safeguarding fiscal discipline, and continued efforts to develop capital markets and increase dinarization. These reforms should help continue Serbia’s success in attracting FDI, and spur domestic investment.

B. Macroeconomic Framework

12. The macroeconomic framework reflects a tight policy mix to help manage the external and fiscal financing needs, control inflation, and support the stabilized exchange rate.

  • Growth. Real GDP growth is projected at 2.5 percent for 2022 and 2.3 percent for 2023. The outlook is dampened by the severe impact of the drought on agriculture, higher energy prices and lower growth projected in European trading partners. Looking ahead, growth is expected to recover modestly to 3.0 percent in 2024, in line with weak global forecasts, and return to potential (about 4 percent) over the medium term.

  • Inflation. Reflecting higher-than-expected global and regional inflation and the drought, inflation is expected to edge up further through 2022, ending the year at 15.8 percent. The need to adjust energy and administered prices further (18 percent share in the basket) will raise inflation pressures in the near term. While core inflation has increased less than in regional peers (e.g., Romania and Hungary), it is expected to rise over the coming months due to delayed passthrough of imported inflation and ongoing wage increases, which have been broadly aligned with inflation. Inflation is projected to moderate gradually to 8.2 percent by end-2023, reflecting base effects, lower food prices (assuming no drought next year) and continued tightening of monetary policy.

  • Current account. The current account deficit is projected to narrow slightly but remain wide in 2023 at 8.4 percent of GDP, largely on account of high energy import costs, weak external demand, and reduced agricultural exports. These pressures are expected to fade over 2024 as domestic electricity production normalizes, regional energy prices decline, domestic energy prices increase, and partner growth recovers. Remittances have remained strong but are expected to moderate somewhat in 2023.

  • Reserves. With escalating energy import costs during the 2021/22 winter and a temporary confidence shock at the start of the war in Ukraine, gross international reserves fell to EUR 13.9 billion by end-May, before recovering strongly to EUR 16.9 billion (above their end-2021 level) by end-October 2022, based on strong remittances, exports, and FDI. FDI to date has remained buoyant based on a supportive investment climate, ongoing near-shoring, and geo-political factors associated with Russia’s war in Ukraine. However, due to rising energy imports during the winter, without exceptional financing, reserves would fall to EUR 15.3 billion (111.4 percent of the ARA metric) by end-2022, and further to EUR 14.5 billion (97.4 percent of the ARA metric) by end-2023. However, incorporating planned disbursements under the SBA and other exceptional financing, reserves are forecast to strengthen over the course of the program and beyond.

C. Energy Sector Policies

13. Energy sector policies will play a central role under the SBA and will focus on energy SOEs financial viability, energy security, and laying the foundations for a green transition. Most pressing for macroeconomic stability is the restoration of cost-recovery for EPS and Srbijagas, and the stabilization of electricity-generation and enhanced energy security over the near and medium term. The program also includes critical steps toward a sustainable energy future, while unlocking opportunities for private sector participation. In parallel, structural reforms to improve governance and management of EPS and Srbijagas will also be important.

14. Cost-recovery is expected for EPS during 2023, and for Srbijgas by the end of the program. Tariff adjustments under the program have been calibrated to meet expected medium-term costs including needed investments and take into account tariff increases in the fall of 2022. Despite these increases, energy prices in Serbia will remain below those in most European countries, in line with its lower cost of supplying electricity and gas. The further tariff increases will be phased in gradually for both households and corporates to help limit adverse social and economic impacts, and targeted budget support will be provided to the most vulnerable. Required tariff adjustments will be reassessed in program reviews and earlier should gas prices spike.

  • Electricity. Following increases in September 2022 in the regulated electricity tariffs for households by 6.5 percent (about 9 percent including the increase in the fee for renewables) and in electricity prices for corporates by 27 percent, an additional combined tariff adjustment by about 15 percent is estimated to be enough to achieve cost recovery. This will be achieved through further increases by 8 percent (prior action) effective from the beginning of 2023 and by 8 percent as of May 2023 (SB). Subsequent increases will be put in place to maintain cost recovery.

  • Natural gas: Given the larger—and more uncertain—medium-term price gap for gas, a longer transition towards full cost recovery is foreseen. A natural gas price increase of 9 percent took place in August for households. Tentative calculations (guided by forward market prices) suggest that a further increase in average tariffs across users of about 45 percent could be required over the medium term to achieve full cost recovery. An 11 percent increase will be implemented as a prior action, effective from the beginning of 2023, followed by 10 percent increases as of May 2023 (SB), November 2023, and May 2024.

15. For both EPS and Srbijagas, improved purchase arrangements are expected to help limit import costs.

  • Electricity. EPS has made arrangements to import suitable coal, rather than only electricity. It can also use limited quantities of natural gas and heavy fuel oil. All this can help limit costs.

  • Natural gas. Natural gas storage capacity was expanded at Banatski Dvor and purchased in Hungary, in total covering about 2-3 months of average consumption, and permitting more active timing of open market purchases during the summer months when prices are typically lower. High storage capacity also permits a trade-off between additional purchases at current prices and using gas in storage. A further expansion of Banatski Dvor is under consideration and would add to purchase flexibility.

16. Under the baseline, and with the phased increase in tariffs, budget subsidies for the energy companies will be phased out over the program period.1 Subsidies for EPS are projected to decline from 0.8 percent of GDP in 2022 to 0.5 percent in 2023 and be eliminated in 2024. Srbijagas is expected to require subsidies through 2024, with the amount falling from 1.2 percent of GDP in 2022 to 0.7 percent in 2024.2 The program also includes a consultation clause in case market prices for gas exceed EUR 250/MWh, to help contain risks to the budget.

17. The authorities have put in place measures to encourage energy savings and mitigate the social impact of the energy crisis. Discounts were introduced for households that reduce their electricity consumption compared to the past. The authorities also launched a public information campaign, instructed public entities to limit energy use, and prepared contingency plans in case of supply disruptions. A budget-financed support program targeted at energy-poor households will be expanded at the start of 2023 alongside the tariff increases.3 This comes on top of the existing system of progressive block tariffs for electricity that applies to all households.

18. Structural reforms will focus on ensuring sustainable energy provision over the medium term.

  • The new government will update the draft National Energy and Climate Plan (NECP) during 2023. With projections as far ahead as 2050, the NECP will provide the vision for the structure and transformation of the energy sector. It will guide long-term investments and should help unlock private sector participation and financing. To enhance energy security and help meet climate objectives, the NECP will target a significant expansion of solar and wind energy. As an initial step, in cooperation with the EBRD, the government plans to launch a first renewable energy auction by in 2023:H1.

  • Consistent with the NECP, and as part of an updated Energy Development Strategy, the government will identify priority investments in the energy sector (May 2023 SB). These projects are to be implemented during the next 2–5 years and will be key for enhancing energy security and stabilizing electricity generation. Projects will include new oil and gas pipelines, pipeline interconnectors, associated transport infrastructure and gas and electricity storage, reversible hydropower (to balance the use of renewables), and metering. Government-financed projects will be incorporated into medium-term capital budget.

  • Recent unexpected power production shortfalls have revealed severe weaknesses in the management of EPS. The program therefore includes reforms to strengthen the governance and management of energy sector companies. The change of the legal status of EPS into a joint stock company is pending (PCI RT, reset as a February 2023 SB), and will support transparency, spur management guided by commercial principles, and open up opportunities for private sector participation. Next, a restructuring plan will be prepared for the company (end-December 2023 SB). Objectives include upgrading internal management reporting, improving production and investment planning, and strengthening financial oversight.

D. Fiscal Policies

19. The nonenergy fiscal deficit in 2022, at less than 2 percent of GDP, is expected to be well below the ceiling under the PCI of 3 percent of GDP, while the deficit including energy sector support is forecast at 3.8 percent of GDP. Revenues are projected to exceed the original budget by 9 percent, despite non-adjustment of specific excises and fees for inflation and a 10 percent reduction in excise taxes on gasoline and diesel to help contain price increases. Expenditures are expected to be higher by 11 percent than originally budgeted, despite some under-execution, largely because of income support and support for energy sector.

Serbia: Rscal Package 1D Re,spond 1D Higher Food and Energy Prices in 2022

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Source: IMF staff and the authorities

Government guarantees to the energy companies (about 1 percent of GDP) are recorded below the line.

20. Except for the temporary fiscal support for the energy sector, the fiscal framework for 2023 and 2024 remains broadly as previously agreed under the PCI, despite the sharply slowing economy, to help control inflation. The non-energy fiscal deficit for 2023 is projected to remain contained at 1.9 percent of GDP, and decline to 1½ percent of GDP in 2024, while the debt ratio is expected to fall to below 55 percent of GDP. Beyond the program, and based on the new fiscal rule, the fiscal deficit is projected to remain at or below 1.5 percent of GDP over the medium term, which would help rebuild fiscal buffers by keeping debt on a downward trajectory.

Serbia: General Go,vernment Fiscal Operations

(Percent of GDP)

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Support to EPS and Srbijagas.

Source: IMF staff and the authorities
  • Deficit. The deficit ceilings under the SBA (quantitative performance criterion, QPC) will incorporate projected energy support of 1.4 percent of GDP in 2023 and about 0.7 percent in 2024. The improvement would be driven by the combination of ongoing energy tariff increases and lower import prices for gas.4

  • Revenues. Following a notable rise in tax collection in 2021 and 2022 related to tax deferrals and other support measures for the COVID pandemic, the sharp economic recovery in 2021, and the impact of rising inflation on tax collection in 2022, the tax ratio is expected to moderate towards historical levels in 2023. A decline in social security contributions to limit the fiscal burden on labor (to help limit emigration and rising wage costs) and continued excise tax reductions on gasoline and diesel also lower revenue. The authorities aim to limit the decline in the tax ratio in 2023 and beyond through ongoing improvements in tax administration, supported by a VAT gap analysis (see below). Staff argued that the rates for all specific taxes and fees should be adjusted regularly to account for inflation. The authorities agreed to phase out the excise tax cuts on gasoline and diesel as market prices decline.

  • Expenditure. The authorities intend to keep the public sector wage bill and pension costs stable as a share of GDP, consistent with the new fiscal rule (Annex III). Public investment spending will remain high (6–7 percent of GDP) given remaining infrastructure gaps, including for energy, transportation and wastewater treatment, as well as new priority projects in energy security and conservation.

  • Fiscal financing. Budget financing for 2022 has been secured, and the authorities’ financing plan for 2023 is realistic. While fiscal gross financing needs are set to increase compared to 2022 because of higher domestic and external debt amortization, the authorities have accumulated a large liquidity buffer in the single treasury account and plan to draw on both domestic and external sources. Fiscal financing for 2023–24 is also being secured. Discussions on a joint budget support loan from the World Bank, KfW and AFD and on a loan to EPS from the EBRD are on track. Furthermore, the authorities plan to use the initial tranche of the SBA (about EUR 1 bn, purchased in 2022) as well as the next two tranches for budget financing.

21. Staff’s Debt Sustainability Analysis finds that Serbia’s overall risk of sovereign distress is moderate (Annex V). Debt is considered sustainable under the shock scenarios considered.

22. The authorities are committed to implementing the newly-adopted fiscal rule. The rule covers the general government and comprises a medium-term deficit objective of at most 0.5 percent of GDP, supported by deficit ceilings linked to public debt levels (see Annex III). As the regular deficit ceilings will inevitably be exceeded in 2023 and 2024 because of the energy crisis and the adverse external environment, transition arrangements have been included in the draft legislation, rather than invoking the escape clause.

23. Fiscal structural reforms are continuing and a new reform wave is planned.

  • Building on the fiscal rule. To strengthen the quality and credibility of fiscal policy, the authorities will develop an action plan to strengthen medium-term budgeting (end-July 2023 SB), with Fund technical assistance. Moreover, regular fiscal monitoring and debt reporting by the Public Debt Agency will be expanded in a sequenced manner through the program period to cover all significant general government entities. In parallel, the Serbian Statistical Office is preparing for a significant update of GFS statistics. Once these data upgrades are available, the parameters of the fiscal rule need to be reviewed (end-November 2024 SB).

  • Public investment management (PIM). Staff emphasized the importance of closely monitoring project implementation, as well as maintaining a well-specified and prioritized public investment plan that draws on a single pipeline of projects, and fully aligning procurement rules with the EU acquis. Strengthening the PIM unit in the Ministry of Finance remains a priority, making full use of the forthcoming PIM IT system. The unit should underpin the ministry’s gatekeeping role in approving and tracking investment projects to help ensure value for money and contain fiscal risks.

  • Fiscal risk management. Expanded reporting on fiscal risks from SOEs, local governments, and litigation in the fiscal strategy was delayed and will now be presented in conjunction with the Fiscal Strategy update for the 2024 budget. Remaining protocols on information sharing with relevant institutions will be signed in 2023:Q2. Going forward, the fiscal risk unit should become more proactive in identifying and mitigating key risks.

  • Public wage registry. The authorities confirmed that the expansion of the public wage and employment registry (ISKRA) to the education sector would likely be completed by March (end-February 2023 PCI RT, reset as end-March SBA SB). Its full roll-out will directly strengthen fiscal controls and pave the way for the delayed reform of the public wage system.

  • Tax administration. With multi-year Fund and World Bank technical assistance, important and ongoing improvements in tax administration have been put in place. Recent milestones include the e-fiscalization system for VAT. Next steps are the introduction of e-invoicing, the start of audits under the new law on unexplained wealth, and a new HR strategy to support hiring new staff. The procurement of a new IT system is expected to be concluded by mid-2023 and will be key for the programmed modernization of business processes.

24. The cost-of-living crisis heightens the urgency of an expansion of targeted social programs. High food prices have had a disproportionately severe impact on the poor. The ongoing roll-out of the Social Card registry and related IT systems for tracking welfare benefits should be used as a basis for expanding the—currently limited—coverage and benefit level of means-tested assistance programs, and can also facilitate targeting.

E. Monetary and Financial Sector Policies

25. Within Serbia’s de-facto stabilized exchange rate regime, the authorities have been tightening monetary policy to help rein in inflation. Successive policy rate increases since April aimed to contain the larger-than-expected rise in inflation and dampen inflation expectations. As in many peers, inflation expectations have risen with the recent inflation surprises, indicating a shift towards a longer timeline to normalize inflation. Nonetheless, with planned wage and pension increases barely compensating for inflation, expectations have remained broadly consistent with the projected declining inflation path. The authorities emphasized the role of the stable exchange rate in containing inflationary pressures, particularly those from high international energy and food prices, and the need for careful calibration of monetary policy tightening to limit recession risks given the significant growth deceleration.


Serbia: Interest Rates


Citation: IMF Staff Country Reports 2022, 384; 10.5089/9798400228803.002.A001

Sources: National Bank of Serbia and Haver Analytics

26. Staff supported the monetary tightening and encouraged the NBS to take further action to curb high inflation and help contain risks to reserves. They encouraged reaching positive real interest rates (on a forward-looking basis) in 2023. Staff acknowledged that a more measured pace of monetary tightening in Serbia compared with emerging market peers could be justified in light of the stabilization of the exchange rate to the euro, which has helped moderate imported inflation and inflation expectations. At the same time, because of the stable exchange rate high inflation could be especially costly by worsening competitiveness. Staff advised the authorities to prioritize reducing inflation and to raise the policy rate further during the coming months.


Serbia: Inflation Expectations 12/24/36 Months Ahead

(in percent as of December 2021 and September 2022)

Citation: IMF Staff Country Reports 2022, 384; 10.5089/9798400228803.002.A001

Note: 1/ Width of bands indicates additional inflation expectation for corporates above the financial sector.Sources: NBS and IMF staff calculations.

27. Monetary tightening should also help contain the recent reversal in deposit dinarization. Deposit dinarization fell from an all-time high of 41.3 percent at end-2021, to 36.9 percent in August 2022 driven by higher risk aversion connected to Russia’s war in Ukraine.5 Higher interest rates in the euro area feed into euro deposit rates, and would incentivize a further drop in dinarization unless counteracted by interest rate increases in domestic currency.

28. The authorities affirmed their intention to maintain exchange rate stability through the crisis period as they consider it essential for macroeconomic stability. They noted the adverse impact of a hypothetical significant depreciation on confidence, inflation, FX denominated debt and the dinarization strategy. Staff acknowledged the benefits of maintaining exchange rate stability under current uncertain conditions to maintain confidence, and recognized that recent appreciation pressures had permitted the NBS to build up reserves. Nevertheless, staff noted the risks to reserves, and reiterated that a gradual return to a more flexible exchange rate over the medium term would be more aligned with a regime of inflation targeting, provide additional flexibility to buffer large shocks, and could help limit risks from the build-up of unhedged FX loans.

29. Notwithstanding comfortable prudential indicators (Table 10), close monitoring of risks in the banking sector remains critical. The NPL ratio declined to 3.2 percent at end-September 2022. Yet, the expected slowdown and the diverging impact of rising inflationary pressures across companies and households warrants close monitoring, particularly for mortgages (17 percent of total loans) and for SMEs and micro-loans. The settings of macroprudential policies (including to help limit euroization) remain appropriate at this stage. In order to resolve the residual assets of the Deposit Insurance Agency’s portfolio (EUR 492 million), the authorities are launching the third and final tendering process in December 2022 with a goal to complete this important process by in 2023:H1.

30. The authorities have introduced measures to promote financial inclusion and mitigate adverse spillovers on the banking system:

  • In June 2022, the NBS adopted a regulation enabling banks to mitigate the negative effects of the change in government bonds’ prices on bank capital by excluding 70 percent of the net unrealized losses and gains from the valuation of the bonds from the calculation of CET 1 capital until the end of 2022. Staff noted the importance of ensuring transparency and market discipline and emphasized that this measure should be strictly temporary.

  • In August 2022, the NBS introduced a limit on the fees for a basic bank account in dinar and required banks to report any fee changes. While recognizing the need to preserve access to basic banking services, staff stressed the need for banks to be able to set their fees in a competitive manner.

  • In September 2022, the NBS mandated the option to reschedule principal payments on agricultural loans for six to twelve months, as the sector has been severely hit by the drought.

31. The authorities plan to enhance the role of capital markets. Serbia’s financial system is largely bank-based. Creating additional channels for financing could help boost domestic private investment. As an initial step within the authorities’ capital market development strategy, a new Law on Capital Markets will be fully applied from January 2023. Further plans for 2023 include a One Stop Shop offering real-time information on capital markets and a new unit in the Ministry of Finance to support capital market participants. However, the introduction of a primary dealer system for one benchmark issuance in 2023:Q1—which was a reform target under the PCI for end-March 2023—no longer seems feasible in the near term, because of banks’ lack of interest in the context of the extended crisis. Staff reiterated that the introduction of covered bonds could be useful for developing capital markets and to support longer-term bank lending.

F. Structural Reforms

32. A new law on the management of SOEs should be finalized soon (end-December PCI RT and SBA SB). The new law aims to improve the oversight and governance of non-financial SOEs. It centralizes the ownership role of the government within the Ministry of Economy, except for energy companies, and it requires SOEs to be corporatized. Staff noted the importance of properly distinguishing between ownership and management responsibilities. Important elements of the underlying SOE strategy will be regulated through by-laws that will be developed as a next step, and staff urged incorporating good international practices for company governance, reporting, and auditing.

33. Staff encouraged the authorities to refrain from export restrictions and limit direct market interventions. Temporary export bans for several basic f ood products including corn, wheat f lour and sunf lower oil were introduced in March. Since then, these measures have been gradually relaxed, converted into export quota, and most have been removed. However, quotas remain in place for a f ew products, including milk. The authorities noted that these measures had benefitted the most vulnerable and helped ensure food security. Staff emphasized the associated market distortions and adverse effects of export restrictions on profitability of firms, and price levels and volatility in regional markets, and reiterated its advice to remove the remaining restrictions as soon as possible. The authorities concurred and indicated that these measures would be phased out completely as soon as food security concerns subside.

34. The authorities noted they were continuing to strengthen anti-corruption and governance initiatives. They highlighted that GRECO no longer listed Serbia’s performance as unsatisfactory (in the Fourth Evaluation Round), and that they are implementing the remaining and new GRECO recommendations from the Fourth and Fifth Rounds. Next steps would include the recommended strengthening (and subsequent enforcement) of the asset and income declaration regime for top executive functions. Staff encouraged ongoing progress and will continue to explore the need for further reforms that could be macro-critical in consultation with the authorities during the program period. Staff also encouraged continued efforts to strengthen the implementation of AML/CFT measures, in particular, the supervision of banks and gatekeepers, and measures to monitor and prevent potential spillovers from the war in Ukraine.

Program Modalities

A. Duration, Access, and Financing Assurances

35. The SBA is proposed for two years (December 2022–December 2024) at 290 percent of quota (equivalent to SDR 1,898.92 million or about EUR 2.4 bn). The proposed duration offers sufficient time for restoring financial viability of the energy sector and meeting the associated financing needs, while also completing the reforms planned under the PCI. Furthermore, resolving the balance of payments problem requires focused structural reforms targeting the energy sector. Consistent with the projected actual balance of payments need, the first purchase, upon approval, would amount to SDR 785.76 million (120 percent of quota or about EUR 1 bn) in late 2022. Two subsequent purchases are foreseen, of SDR 163.70 million (25 percent of quota) by mid-2023 and of SDR 316.53 million (48.34 percent of quota) by late 2023. For 2024, at this time, a potential balance of payment need is projected under an adverse scenario only, inter alia in case high energy prices or low trade partner growth were to persist longer than assumed in the baseline (Annex IV). Two purchases, available on a precautionary basis, are scheduled for 2024 that would amount to SDR 316.46 million (48.33 percent of quota) and SDR 316.47 million (48.33 percent of quota), respectively (Table 11b).

36. Purchases would boost buffers and provide direct budget financing.6 The first program purchase in late 2022 will provide actual, immediate reserve buffer needs equivalent to the purchased amount, given heightened uncertainties. These buffers would also help attend the balance of payments needs arising from the energy crisis are associated with actual and prospective fiscal financing needs in early 2023 that cannot be met through indirect budget financing through the domestic banking system.7 Moreover, further program purchases under the SBA in 2023 would be also expected to be used as budget support given the energy-related BOP gap.

37. Financing Assurances. The external financing needs over the first twelve months of the program are projected to be fully financed, with good prospects for the remainder of the program. In particular, current projections foresee a remaining external financing gap of EUR 0.9 bn over 2022–24 in the baseline (Table 5a), after Fund financing. This is expected to be covered by an EBRD liquidity loan of EUR 0.2 bn and 0.1 bn (early 2023 and early 2024), and a World Bank-led development policy operation with two tranches of USD 0.3– 0.4 bn each available in 2023 and 2024, respectively; discussions are well advanced.

B. Capacity to Repay the Fund and Risks to the Program

38. Serbia’s capacity to repay the Fund is assessed to be adequate (Table 5b), including under the adverse scenario (Annex IV). Serbia’s track record of using Fund resources and maintaining macroeconomic stability is strong. Under the baseline, with proposed access of 290 percent of quota, Fund credit outstanding would reach a maximum of 3.3 percent of GDP and 14.1 percent of gross reserves in 2024, while debt service to the Fund would rise to 1.9 percent of exports of goods and nonfactor services in 2027.

39. The proposed program carries moderate risks while uncertainty is substantial. Key risks to the program stem from the uncertain duration of the war in Ukraine and its economic repercussions across Europe, global recession risks and further commodity price shocks (Annex I). Delays in increasing energy tariffs or reforming the energy sector could prolong the fiscal drain. Confidence shocks could result in large and sudden deposit withdrawals and reserve losses. To mitigate the risk of undue reserve losses, a floor on NIR is included in the program. If an adverse scenario were to materialize, further policy adjustment would be an important mitigant to program risks, as illustrated in Annex IV. The authorities have a strong track record of program implementation even at difficult times.

C. Program Monitoring, Conditionality and Safeguards Assessment

40. The program will be monitored through semi-annual reviews, quantitative targets, and structural benchmarks. Test dates will be end-December and end-June. Indicative quantitative targets will be set for end-March and end-September.

  • Quantitative targets (see MEFP Tables 1b and 1c). Staff proposes performance criteria for end-June and end-December 2023, as well as indicative targets (ITs) for end-March and end-September 2023. These include a ceiling on the general government fiscal deficit, ceiling on current primary expenditures, and a floor on net international reserves consistent with gross reserves at 80 percent of the ARA metric, an IT ceiling on accumulating domestic arrears, and a continuous zero ceiling on accumulation of external debt payment arrears (see MEFP and TMU). The program also includes inflation consultation and natural gas price consultation clauses. Standard continuous performance criteria also apply.

  • Structural conditionality (see MEFP Table 2b).

    • The SBA program includes three prior actions: (i) adopting the 2023 Budget by the National Assembly consistent with key fiscal parameters agreed with staff, including the overall deficit; (ii) increasing average natural gas tariffs by at least 11 percent from January 2023; (iii) increasing electricity tariffs by 8 percent from January 2023.

    • The SBA also takes forward the PCI reform targets to (i) adopt a new SOE law, (ii) change the legal status of EPS to a joint stock company, and (iii) establish a central electronic public wage and employment registry that will help rationalize pay and improve incentives across the public sector. Structural benchmarks requiring step increases in domestic electricity and gas tariffs will reduce fiscal costs. Among the critical benchmarks to support energy security are the formulation of a strategic restructuring plan for EPS and the development of a prioritized investment plan for the energy sector. A new set of fiscal rules adopted under the PCI will be further enhanced by reflecting upcoming data upgrades and medium-term budgeting.

41. An update safeguards assessment of the NBS will be conducted before the first review of the program. The previous safeguards assessment was completed in 2015 and found that the NBS had maintained generally strong controls.

Staff Appraisal

42. Notwithstanding a history of responsible macroeconomic policies, the ongoing external economic shocks have brought to the fore Serbia’s vulnerabilities in the energy sector. Under consecutive Fund-supported programs, Serbia rebuilt its financial buffers and financial reputation, and successfully supported the economy through the pandemic crises. However, poor management and investment planning in the energy sector have resulted in severe shortfalls in electricity production since late 2021, and a focus on providing low-cost energy has, at times, limited tariff increases to underpin medium-term cost recovery. Against this background, energy import costs have escalated in the wake of Russia’s invasion of Ukraine, which resulted in a severe terms-of-trade shock for most countries in Europe. More broadly, the war has caused a further rise in inflation, lower growth across partner countries, and constrained financial markets. As a result, a slowdown in Serbia’s growth and serious balance of payments and fiscal financing needs are projected for 2023, with risks continuing through 2024.

43. While domestic policies cannot control the ongoing external energy shocks, they are critical for a return to fiscal and external sustainability. Part of the rise in energy import costs due to higher oil and gas prices is expected to be permanent. In addition, urgent reforms are needed to resolve the structural weaknesses in the energy sector. Domestic energy tariffs need to increase to promote energy conservation and ensure medium-term cost recovery for the energy companies, taking into account higher investment needs to ensure energy security and the greening of energy supply.

44. Furthermore, both monetary and fiscal policies should be tightened, to help contain high inflation and support the stabilized exchange rate. While high inflation was triggered by rising food and energy prices, the ongoing tightening of monetary policy is crucial for ensuring that it does not become entrenched. Fiscal consolidation will be important to support monetary policy. The stabilized exchange rate reinforces the need for tight macroeconomic policies, to help maintain adequate reserves as well as confidence in the financial outlook. That said, gradually allowing more exchange rate flexibility once the crisis is over could be beneficial.

45. Important measures have been adopted to address the fiscal and external imbalances, and will be expanded under the program. Initial increases in domestic gas and electricity prices this past fall are complemented by further steps at the start of the program. Targeted support for energy-poor households has been expanded. The budget for 2023 contains the non-energy fiscal deficit, despite the economic slowdown. Wage and pension spending will be controlled. Over time, these policies are also expected to reduce the current account deficit.

46. Building on Serbia’s strong track record of policy implementation, the program foresees continued measures to put the energy sector on a sound financial footing. The energy companies should become financially sustainable within the program period. A next tariff increase of energy tariffs will become effective after the winter, followed by further adjustments. Investments in electricity generation should shift to renewables, guided by new business plans, possibly supported with private sector involvement, and implemented by professional, permanent management.

47. More broadly, Serbia’s public finances should be bolstered by ongoing reforms to public financial management. The recent adoption of new fiscal rules serves to anchor fiscal consolidation and support fiscal buffers beyond the program period. The program also includes reforms to improve medium-term budgeting, tax administration, and the control of wage and pension costs.

48. Risks to the program are moderate. The authorities’ strong track record provides assurances of sound policy implementation, including fiscal consolidation and structural reforms. The possible need for further energy tariff adjustment will be assessed on a regular basis during the program reviews. The authorities’ immediate focus on bolstering energy security should help shield against supply risks.

49. Access of 290 percent of quota is justified by Serbia’s actual and potential balance of payments needs. The program is strong; it includes targeted and feasible measures to address the energy shock as well as to strengthen institutions that underpin growth and financial stability over the medium term. Furthermore, the authorities have been successful in identifying additional financing sources, which could supplement the Fund’s resources, while absence of the Fund’s seal of approval might jeopardize access to those sources. The proposed level of access is appropriate, conditional on the continued support from other official creditors; and consistent with medium-term debt sustainability, provided the program is implemented as envisaged and unforeseen shocks are addressed promptly.

50. Staff supports the authorities’ request for a 2-year SBA and the completion of the 3rd Review under the PCI.

Figure 1.
Figure 1.

Serbia: COVID-19 Evolution

Citation: IMF Staff Country Reports 2022, 384; 10.5089/9798400228803.002.A001

Figure 2.
Figure 2.

Serbia: Real Sector Developments

Citation: IMF Staff Country Reports 2022, 384; 10.5089/9798400228803.002.A001

Figure 3.
Figure 3.

Serbia: Balance of Payments and NIR

Citation: IMF Staff Country Reports 2022, 384; 10.5089/9798400228803.002.A001

Figure 4.
Figure 4.

Serbia: Financial and Exchange Rate Developments

Citation: IMF Staff Country Reports 2022, 384; 10.5089/9798400228803.002.A001

Figure 5.
Figure 5.

Serbia: Inflation and Monetary Policy

Citation: IMF Staff Country Reports 2022, 384; 10.5089/9798400228803.002.A001

Figure 6.
Figure 6.

Serbia: Selected Interest Rates and Credit Developments

Citation: IMF Staff Country Reports 2022, 384; 10.5089/9798400228803.002.A001

Figure 7.
Figure 7.

Serbia: Fiscal Developments

Citation: IMF Staff Country Reports 2022, 384; 10.5089/9798400228803.002.A001

Figure 8.
Figure 8.

Serbia: Labor Market Developments

Citation: IMF Staff Country Reports 2022, 384; 10.5089/9798400228803.002.A001

Table 1.

Serbia: Selected Economic and Social Indicators, 2019–2027

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

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.

Table 2.

Serbia: Medium-Term Framework, 2019–2027

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Sources: NBS, MoF, SORS and IMF staff estimates and projections.

Using constant dinar/euro and dinar/swiss franc exchange rates for converting FX and FX-indexed loans to dinars.

Includes employer contributions.

Includes amortization of called guarantees.

Calculated as one-off revenue items minus one-off expenditure items. Negative sign indicates net expenditure.

Table 3.

Serbia: Growth Composition, 2019–2027

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Sources: Serbian Statistical Office; and IMF staff estimates and projections.
Table 4a.

Serbia: Balance of Payments, 2019–2027 1/

(Billions of euros)

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Sources: NBS; and IMF staff estimates and projections.

Excluding net use of IMF resources.

Includes SDR allocations in 2021.

Includes trade credits (net).

Table 4b.

Serbia: Balance of Payments,2019–2027 1/

(Percent of GDP)

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Sources: NBS; and IMF staff estimates and projections.

Excluding net use of IMF resources.

Includes SDR allocations in 2021.

Includes trade credits (net).

The risk-weighted metric is IMF's ARA metric for the fixed exchange rate. Serbia was reclassified as stabilized exchange rate regime in 2019.