Republic of Serbia: Third Review Under the Stand-By Arrangement and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Republic of Serbia
Author:
International Monetary Fund. European Dept.
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Publication Date:
08 Jul 2024
eISBN:
9798400278365
Language:
English
Keywords:
Serbia Serbia EXPO; short-term debt; core inflation; portfolio investment balance; investment financing; Credit
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1. Serbia continues to recover well from the recent energy crisis. Growth is increasing, inflation is falling, the current account deficit has narrowed, reserves are at a record high, and public debt is on a downward path. Program reviews have been completed successfully, with the program turning precautionary earlier than envisaged given the strength of program outcomes.

Context

1. Serbia continues to recover well from the recent energy crisis. Growth is increasing, inflation is falling, the current account deficit has narrowed, reserves are at a record high, and public debt is on a downward path. Program reviews have been completed successfully, with the program turning precautionary earlier than envisaged given the strength of program outcomes.

2. With a decisive win in the December parliamentary elections, the new government is focused on bolstering investment and economic growth. The ruling SNS-led coalition is focused on a new development plan, "Leap into the Future—Serbia EXPO 2027,” anchored around Specialized EXPO 2027 which will be held in Belgrade. The plan envisages higher public investment spending through 2027, accompanied by higher fiscal deficits, while keeping public debt on a downward path (see Box 1).

3. Geopolitical and regional developments present challenges and opportunities. Serbia is an EU candidate country, but limited progress on normalizing Serbia-Kosovo relations, and limited alignment with the EU on foreign policy positions remain obstacles to accession. The unified labor market recently established under the Open Balkans Initiative offers potential for regional economic integration and could help alleviate constraints on the Serbian labor market.

Recent Economic Developments

4. Growth has picked up and the labor market remains strong. Growth was driven by net exports in H1:2023, as imports declined alongside weaker domestic demand. Private consumption has since begun to recover, supported by falling inflation and positive real wage growth. Investment has also picked up, reflecting continued high FDI, government spending on capital projects, and a recovery in inventories. Unemployment is near historic lows and real wages are staging a recovery.

5. Headline and core Inflation are falling towards the upper bound of the NBS’s inflation target band. Headline (5.0 percent y/y in April 2024) and core (4.8 percent y/y) inflation have fallen sharply to just above the upper bound of the NBS’s inflation target band of 4½ percent, supported by tight NBS and ECB monetary policy, easing global price pressures, falling food and energy inflation, and favorable base effects. Inflation expectations have also fallen sharply, with 12-month ahead financial market participant expectations down to 4 percent.

Serbia: Inflation Developments, 2022-24

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Note: All figures are annualized

6. With a narrower current account deficit and continued high FDI, reserves increased further (Figure 5). The current account deficit narrowed to 2/ percent of GDP in 2023 from almost 7 percent in 2022, supported by falling energy prices, resilient exports (including of ICT services), some import compression, and strong remittances. With continued high FDI inflows, reserves increased to almost €25 billion, or about 160 percent of the IMF's reserve ARA metric at end-2023. These dynamics are consistent with Serbia's external position in 2023 being stronger than implied by fundamentals and desirable policies (see Annex II).

Leap into the Future—Serbia EXPO 2027

In January 2024, the President unveiled an ambitious "Leap into the Future - Serbia EXPO 2027" investment program, which spans 2024-27, and culminates in Specialized EXPO 27. The program comprises mainly infrastructure investment at a cost of EUR 17.8 billion (about 23 percent of 2024 GDP). Since most of this investment will be accommodated within the large public investment envelope already penciled in for the coming years (about 7 percent of GDP annually), the increases in annual public investment outlays and fiscal deficits over the next years are projected at 0.7-1 pps of GDP. This would bring public investment to about 8 percent of GDP a year and raise the fiscal deficit to 2% percent of GDP for 2025 and 2% percent in the following years—up from 1% percent under the fiscal rule.

Transportation infrastructure constitutes the bulk of the program and envisages constructing and upgrading 500 kilometers of highways and expressways, 2,000 kilometers of railways, and two inaugural metro lines in Belgrade.

Energy sector projects include renewable electricity production (solar and wind), reversible hydroelectric plants, expanded natural gas storage, a gas interconnector with North Macedonia, and an oil pipeline to Hungary. While it is yet to be decided whether the large energy projects will be financed through the budget or by the energy SOEs, it is highly unlikely that the energy SOE’s balance sheets will be able to carry such large investments without budgetary support.

The program also allocates resources to education, science, and culture, with proposals to construct a research campus catering to 4,000 students. Cultural initiatives include repurposing the old hall of the Belgrade Fair into an opera and ballet venue, alongside the construction of a new Belgrade Concert Hall.

The program also entails the development of infrastructure and facilities for EXPO 2027, including a new National Stadium with 52,000 seats and a railway connecting the Expo site and national stadium with Belgrade Airport and the city center.

Serbia: Leap into the Future—Serbia EXPO 2027

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Source: National authorities.

7. Fiscal outcomes were good last year despite further ad hoc spending measures. The general government overall fiscal deficit fell to 2.2 percent of GDP in 2023, well below the 2.8 percent of GDP envisaged under the revised 2023 budget, despite additional ad-hoc transfers. VAT receipts were high, while wages and subsidies were lower than budgeted. Capital budget execution was close to target, but heavily backloaded. Favorable financing conditions and IFI loan disbursements allowed some pre-funding of the 2024 budget.

8. Energy SOE finances have improved. The electricity utility Elektroprivreda Serbije (EPS) and the natural gas utility Srbijagas benefitted from tariff hikes agreed under the program, lower energy import prices, and improved supply conditions. With a good hydropower season and higher generation in coal-fired plants, EPS moved from emergency electricity imports to electricity exports, and achieved record profits of close to €800 million (1.2 percent of GDP). Srbijagas also made a profit.

9. The banking system appears sound, while credit growth remains sluggish (Figures 9, 10). Aggregate bank capital adequacy, liquidity, and profitability are high, and non-performing loans (NPLs) and stage 2 loans are low. At the same time, high interest rates, tight credit standards, and the expiry of various loan guarantee schemes have contributed to subdued credit growth. While Euroization remains high, deposit dinarization has increased over the past couple of years.

Outlook and Risks

10. The baseline outlook remains favorable, with growth recovering and inflation falling, and with a sustainable external position, all with stepped up public investment through 2027.

  • Growth is projected to increase to close to 4 percent in 2024, reflecting carryover from 2023 (1/ percentage points), rising private consumption as real wages increase and employment remains robust, and higher investment as FDI inflows remain high, the government increases capital spending, economic uncertainty declines, and inventories recover. Indeed, growth so far this year has been higher than expected. Growth is expected to reach its potential of about 4 percent over the medium term.

  • Inflation is expected to fall soon to within the NBS's target band, before moving to the inflation target of 3 percent, reflecting past monetary policy tightening and falling energy and food inflation.

  • With consumption and investment picking up, the external current account deficit is projected to widen to around 4 percent of GDP in 2024, before rising somewhat further over the medium term. Reserves are set to continue to increase and to move to within the IMF's recommended reserve adequacy bands over the medium term (reserves are currently above the upper band), although they are projected to increase by less than before reflecting the new investment plans.

Serbia: Key Macroeconomic Variables, 2022-2029

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

11. Risks to the outlook appear broadly balanced (Annex I). Downside growth risks include an escalation of regional or global geopolitical tensions, an abrupt global economic slowdown, and renewed global financial market instability. Geopolitical fragmentation risks could hamper investment but could also fuel nearshoring. On the domestic policy side, risks associated with stepped up public investments will need to be managed carefully, including construction cost pressures. Besides possible additional nearshoring, upside risks include higher growth.

Program Performance

12. All program quantitative targets were met. All end-December 2023 quantitative performance criteria (QPCs) on the fiscal deficit, on current primary expenditure, and on NIR were met by substantial margins. Headline inflation rates in December 2023 and March 2024 were within the Inflation Consultation Clause (ICC) band. The standard continuous performance criteria and all end-December 2023 and end-March 2024 indicative targets (ITs) were also met. End-June QPCs and ITs are on track.

13. The structural reform agenda continues to progress, albeit with some delays:

  • The expansion of the central electronic public wage and employment registry (Iskra) to cover the health sector was met (end-January 2024 SB). Iskra now covers around 80 percent of public sector workers.

  • The SB on a new gas pricing system for the non-regulated sector (end-January 2024 SB) that was to become effective on May 1, 2024, was not met. While there was a broad agreement on the need to remove gas price controls for the non-regulated sector, it took longer than expected to agree on accounting solutions and on Srbijagas' compensation for the high gas and gas storage costs during the crisis. As a result of these discussions, Srbijagas restored the pre-crisis market-based pricing methodology with effect from May 1, 2024, and was compensated for the high gas and gas storage costs during the crisis by reducing liabilities to the Republic of Serbia. At the same time, it has become clear that further changes to the gas pricing system for the non-regulated sector are needed, focusing on the pricing margin, to help ensure the sustainability of Srbijagas' financial position in the long term, and a new SB is proposed (see H26).

  • The SB on a restructuring plan for EPS (May 1, 2024 SB) was completed with a short delay on May 31, 2024 on account of interruptions from a cyber-attack on EPS IT systems.

  • EPS' work on a new electricity pricing system for the non-regulated sector (end-August 2024 SB) is progressing.

  • The preparation of a draft bylaw under the new SOE governance law, which will set out regulations for determining public service obligations incurred by SOEs when implementing broader public sector goals (end-September 2024 SB), is making progress and is being supported by IMF technical assistance.

Policy Discussions

A. Monetary Policy—Securing Sustainable Disinflation

14. It was agreed that monetary policy is appropriately tight. The NBS has kept its policy rate at 6.5 percent since July 2023, as inflation and inflation expectations have fallen. As a result, real ex ante policy rates are now positive and above the estimated neutral rate by most measures, and inflation momentum has improved.

15. It was also agreed that monetary policy should remain tight until disinflation is safely secured. Staff argued that disinflation could be considered secured only once inflation expectations are firmly within the NBS's inflation target band and headline and core inflation have fallen close to the upper bound of the band, given risks to disinflation from an uncertain external environment, a tight labor market, and fiscal spending plans. The authorities are closely monitoring euro area inflation developments and ECB policy rate actions given the high degree of euroization and the importance of the ECB rate in Serbia's monetary transmission mechanism.

16. The de-facto stabilized exchange rate remains a key anchor, although staff indicated that greater exchange rate flexibility over time could be considered. A gradual return to a more flexible exchange rate over the medium term would be more consistent with the official inflation targeting regime and would provide an important shock absorbing role. The authorities emphasized the importance of a stable exchange rate for macroeconomic stability and private sector confidence, a view echoed in meetings with private sector counterparts.

B. Fiscal Policy—New Investment and Growth Plans

17. The authorities remain committed to their 2024 fiscal program targets. The deficit target of 2.2 percent of GDP is consistent with a broadly neutral fiscal impulse and with falling public debt. Although scheduled excise tax increases were delayed, revenues are performing well, with VAT and social security contributions especially high. Energy SOEs are not expected to require any liquidity support this year. And, beyond a small increase in the new birth grant program, announced in January 2024, and yet to be implemented, the authorities intend to refrain from ad hoc spending measures.

18. The authorities plan on higher deficits over 2025-27 than envisaged under the fiscal rule to allow for higher investment under their development plan (see Box 1). The revised deficit targets of about 2/ percent of GDP for 2025 and 2% percent through 2027—up from 1/ percent under the fiscal rule—were agreed with staff. These new targets make room for infrastructure projects under the Leap into the future—Serbia EXPO 2027 development plan. While infrastructure gaps exist, staff urged caution over stepped-up investment spending from already high levels, which could, especially under a tight labor market, lead to steep project cost increases. Staff also called for careful project prioritization and for public investment management and transparency reforms to help ensure project quality and manage risks (see below), considering that government-to-government agreements circumvent the traditional public procurement process. The fiscal deficit element of the rule due to be introduced in 2025 is being postponed to allow for higher investments, which risks undermining the effectiveness of the fiscal rule. That said, staff acknowledged that the new deficits appear consistent with macroeconomic stability and the pension and wage elements of the fiscal rule remain in place. Staff also called on the authorities to clearly communicate their fiscal plans and fiscal deficit and debt objectives.

19. Public debt continues to fall under the new higher deficit path, and staff assesses debt as sustainable. The latest Debt Sustainability Assessment (DSA) findings suggest that debt remains sustainable. Public and publicly guaranteed debt should fall to about 47 percent by 2029 (Annex II), higher than under the 2nd review as additional public investment under the Leap into the future— Serbia EXPO 2027 development plan implies higher fiscal deficits and a further accumulation of contingent liabilities.

20. Debt management continues to address fiscal financing risks. Large external financing inflows and robust domestic issuances at longer maturities have allowed a further build up in large Treasury cash reserves, which both staff and authorities saw as a welcome buffer in uncertain times. Domestic debt issuance in 2024 will continue to focus on longer-term dinar denominated benchmark bonds, to support higher non-resident participation, increase the proportion of dinar debt, and continue to lengthen average debt maturities. The debt management strategy also envisages the issuance of bonds on international markets when conditions are favorable. Sizeable borrowing from international and bilateral development partners continues to finance priority capital investment projects.

21. Staff and the authorities agreed that additional public investment management (PIM) reforms were needed given the stepped-up investment budget (MEFP A19-20). Reforms will focus on public investment transparency, which is critically important, and will also encompass project preparation, selection, and implementation, supported by IMF technical assistance.

  • Since the lack of comprehensive information on total costs of various public investment projects in official documents impedes public scrutiny of their value-for-money, it was agreed that the authorities will include in their annual fiscal strategy documents a new table reporting on each project (excluding security and defense) the following: expenditure to date, spending estimates for the current year, budgeted amounts for the budget year, expenditure projections for the two outer years, and estimated total project cost (proposed new end-November 2024 SB). Disclosing this information under a new accelerated timeline underscores the authorities' commitment to increase the transparency of capital investment projects, as outlined in the action plan for improving the medium-term budget framework adopted in 2023.

  • For all projects above €20 million (except where government-to-government contracts prescribe confidentiality), ministries will publish appraisal documents. Moreover, for projects included in the Leap into the Future—Serbia EXPO 2027 development plan, the information on the website Srbija 2027 will be expanded.

  • Progress is being made in implementing the new Decree on Capital Projects (adopted in September 2023), which seeks to establish a single project pipeline for all ongoing and future investment projects. All necessary secondary legislation, rule books, and forms have been adopted and broader implementation of the new Decree is taking place.

  • The new Public Investment Management Information System (PIMIS), operational from June 1, 2023 is being upgraded to make it consistent with the Decree on Capital Projects. In April 2024, the authorities sent a circular to all line ministries regarding the upgraded version of PIMIS and their obligations thereon. The expansion of PIMIS's usage to the national level by mid-2024 is on track, and local and provincial capital projects are scheduled to be included into PIMIS in 2025.

  • The Public Procurement Office will continue its public reporting, including on procedures that were exempted from the regular procurement regime.

  • A carefully phased approach to investment will be needed to help contain construction costs. Staff called for carefully monitoring of such costs.

22. The authorities continue to press ahead with broader fiscal structural reforms:

  • Medium-term budgeting (MTB), fiscal risk management, and fiscal data. MTB reforms are focusing on strengthening baseline budget estimates. The authorities are working on improving and expanding coverage of government finance statistics. Related adjustments to the parameters of the fiscal rule will be considered in 2024:H2 (end-November 2024 SB, MEFP A16).

  • Tax administration (STA, MEFP A22). The recent tender for a commercial off-the-shelf tax IT system (COTS) was unsuccessful. The authorities remain committed to procuring a COTS and are considering next steps with World Bank TA. The unit evaluating tax non-compliance of high-net-worth individuals issued a tax assessment in their first case. And VAT gap analysis and risk management improvements continue. Looming staff shortages because of retirements and administrative rigidities in hiring remain a critical risk to tax collection. Responding to staff concerns, the STA is intensifying its reform efforts in the areas of HR planning, management, and recruitment, but staff cautioned that further efforts would likely be needed (Annex IV). Fund TA is continuing in this important area.

  • Public wage and employment registry. The central public wage registry Iskra is being expanded further to include indirect beneficiaries of local self-government by 2024:Q4, and remaining public employees (Ministries of Defense/Internal Affairs, Security Information Agency and higher education institutions) by 2027. The Iskra registry will play an essential role in designing a public sector wage reform, which is becoming increasingly important because of mounting difficulties in attracting essential skilled employees such as engineers, IT specialists, and managers to the public sector.1

C. Energy Sector Policies—A Focus of the Program

Electricity Sector

23. EPS finances have improved, and further reforms to its pricing systems aim to underpin the company’s financial sustainability and support investment needs. EPS is developing a new electricity pricing system for the non-regulated sector (mostly firms), to become effective November 1, 2024 (end-August 2024 SB). Starting from May 1, 2024, the authorities replaced the fixed electricity price for the non-regulated sector, introduced during the energy crisis, with pricing that follows pre-energy crisis market-based methodology. As a result, average EPS electricity supply tariffs fell reflecting the decline in regional electricity prices. Should regional electricity prices decline further, there is a risk that average electricity tariffs may fall below costrecovery levels absent higher tariffs for the regulated sector (mostly households). The authorities are, therefore, developing a holistic electricity pricing system for regulated and non-regulated sectors that aims to address these risks.

24. The EPS restructuring plan is an attempt to bring tangible changes to the company’s operations.

  • The plan was developed by EPS management and the Ministry of Energy with input from consultants and specifies reform priorities in the areas of organizational and financial restructuring, human resources, procurement, project development, reporting, risk management and the environment.

  • It was agreed that the envisaged restructuring would take time to implement given the many previous failed attempts and the complexity of the reforms. Without pursuing restructuring and introducing a new electricity pricing system, EPS would likely not manage to finance the new major energy investments and would need support from the budget for investment financing. Thus, developing a holistic electricity pricing system for regulated and non-regulated sectors is pivotal to allow EPS to pursue the new investment cycle, achieve energy security, deliver on green agenda goals, and reach a sustainable financial position in the long term.

  • Continued governance reforms in EPS are a precondition for successful EPS restructuring. While the new EPS supervisory board, in place since June 2023, has appointed several permanent executive directors, it has yet to appoint a permanent CEO. Pressing ahead with filling the remaining executive positions is fundamental for making tangible changes in EPS operations and implementing the EPS restructuring plan.

25. Governance reforms of the distribution company Elektrodistribucija Srbije (EDS) should also be stepped up, especially given ongoing large-scale investments in the distribution network financed by international loans under sovereign guarantees.

Natural Gas Sector

26. Srbijagas agreed to finalize its new gas pricing methodology to support its long-term financial sustainability and its investment needs. After removing gas price controls for the non-regulated sector on May 1, gas prices for this consumer segment (mostly firms) returned to the pre-energy crisis gas pricing methodology, and gas prices fell as a result. Non-regulated tariffs now reflect gas import costs plus an average margin of about 5 percent. To ensure the long-term financial sustainability of Srbijagas, a higher average margin is likely needed, especially given large infrastructure investments needs. The authorities agreed to review the margin and to increase it as needed. This review will help update the pricing methodology for the non-regulated sector, to come into effect on August 1, 2024 (proposed new end-July 2024 SB).

27. To bolster its energy security, Serbia has diversified its gas import routes and plans to ramp up its domestic gas storage facilities.

  • The Serbia-Bulgaria gas interconnector, completed in late 2023, allows Serbia to access gas from Azerbaijan and LNG terminals in Greece and Turkiye. While the interconnector is currently at trial stage with limited capacity, the full capacity of the pipeline on the Serbian side is 1.8 bcm a year (about 60 percent of Serbia's current annual gas consumption). Serbia also signed a contract with Azerbaijan for the delivery of 0.4 bcm of natural gas by the end of 2024.

  • Since late 2022, the authorities have rented natural gas storage facilities in Hungary to supplement domestic storage. Going forward, the authorities plan to expand domestic gas storage capacity, form strategic reserves, and develop a system for the management of such reserves.

D. Financial Sector Policies—Maintaining Continued Resilience

28. Bank prudential indicators remain sound but continued vigilance is warranted. The NBS continues to undertake regular stress tests of the banking sector, which have to date indicated that Serbian banks remain resilient to a variety of macroeconomic shocks.

29. The NBS plans on allowing remaining forbearance measures, adopted during the energy crisis, to expire as scheduled. The NBS continues to phase out the exceptional accounting treatment of unrealized losses on bank holdings of government bonds. The NBS also plans to drop mortgage interest rate caps at end-2024, to be accompanied by monitoring its impact on borrowers. Loans to financially distressed natural persons, rescheduled in 2022-23, will be assessed for reclassification from IFRS9 stage 2 to stage 3 if necessary.

30. Strengthening of the prudential framework continues, in consultation with financial sector stakeholders. The new foreign currency net stable funding ratio (FX NSFR) requires a phased approach to implementation to allow time to assess its potential impact on bank funding and credit supply.

31. Initiatives to develop credit markets continue. The first placements under the new Corporate Bond Issuance Program are expected soon, offering a complement to the prevailing bank-based model of corporate finance. Reforms to improve the legal environment for debt resolution and to ensure more judicial and tax certainty for lenders could also help with credit market development.

32. Serbia is making progress in strengthening its AML-CFT framework. The latest MONEYVAL Enhanced Follow-up Report assessed Serbia to be fully or largely compliant with all 40 FATF recommendations.2 The authorities also enacted a new Law on Central Records of Beneficial Owners to strengthen beneficial ownership reporting, data management, and enforcement. The NBS continues its enforcement of AML/CFT regulations through on- and off-site inspections of financial institutions, including assessing transactions by non-residents from high-risk foreign countries. Reform plans for 2024 include: (i) updating the national risk assessment (NRA); (ii) updating the national AML-CFT strategy and action plan to reflect the recent peer assessment and NRA; and (iii) preparing for the mutual evaluation process for the MONEYVAL evaluation round.

E. Governance and Other Structural Policies

33. Staff called for continued efforts to implement the new landmark SOE governance law, given the importance of bolstering SOE performance. The new SOE governance law, which is aligned with the OECD Guidelines on Corporate Governance of SOEs, is set to take effect from midSeptember 2024, while some transition provisions last until early 2025. The authorities are working closely with international experts to prepare secondary legislation that will allow the law to take effect, including an important bylaw on public service obligations (end-September 2024 SB). Yet addressing staffing shortages at the Ministry of Economy is urgently needed to allow the relevant unit to handle its greatly expanded responsibilities under the new law.

34. Staff welcomed the expansion of the protection program for energy-vulnerable households. The number of eligible households increased by about 100,000 to around 170,000 by end-2023 after the relevant decree was amended to include pensioners on minimum pensions and recipients of means-tested social assistance programs. The authorities plan to digitize the procedure for obtaining energy-vulnerable customer status by end-2024.

35. The NBS is implementing the recommendations from the safeguards report of June 2023. In particular, the internal regulations for the NBS Council and its Audit Committee have been updated to provide for external subject matter expertise (when needed) and work is progressing on strengthening the risk management function and updating the Internal Audit Charter.

Program Modalities

36. The authorities intend to continue treating the SBA as precautionary (Table 11). With supportive external conditions, gross international reserves (GIR) have increased further. The authorities do not plan to make a purchase after completion of this review (SDR 316.46 million or about Euro 399.8 million), increasing available, undisbursed balances including the 2nd review tranche to SDR 632.99 million or about Euro 799.7 million.

37. The program remains fully financed, and Serbia’s capacity to repay the Fund is assessed to be adequate. Firm official financing commitments are in place for the next year with good prospects thereafter, and the authorities have demonstrated access to international capital market financing (Table 5a). Capacity to repay metrics remain strong in terms of exports and reserves (Table 5b). Fund credit outstanding would reach a maximum of 3.1 percent of GDP, and 8.5 percent of gross reserves in 2024, under the baseline, with purchases of total authorized access, including precautionary tranches. Debt service to the Fund would peak at 1.7 percent of exports of goods and nonfactor services in 2027 before declining.

38. The authorities have requested modifications of program performance criteria and indicative targets (MEFP Table 1a):

  • Raise the NIR floor to be consistent with GIR of 100 percent of the ARA metric (end-June 2024 QPC, and end-September 2024 IT);

  • Modification of the Inflation Consultation Band (+/- 1.5 ppt around the central inflation projection) in line with latest projections (end-June and end-September 2024 ITs).

39. New proposed structural benchmarks complete the reform agenda on energy pricing, and enhance the transparency of public investments (MEFP Table 2):

  • A new structural benchmark on updating the Srbijagas methodology for gas price calculation for the non-regulated sector that will come into effect on August 1, 2024 (end-July 2024 SB).

  • A new structural benchmark on including in the Revised Fiscal Strategy 2025 with Projections for 2026 and 2027 a table that incorporates the following information for all budgeted public investment projects apart from those related to defense and security: project expenditure to date; spending estimate for current year, budgeted amount for the budget year; expenditure projections for two outer years; and estimated total project cost (end-November 2024 SB).

Staff Appraisal

40. Serbia continues to make good progress under its Fund-supported SBA program. Growth is increasing, unemployment is at a record low, and inflation is falling towards target. With a narrower current account deficit and still-high FDI flows reserves have reached record highs. Fiscal consolidation has succeeded in lowering public debt further. And, with lower global energy prices and sizable tariff increases, fiscal risks from energy SOEs have subsided.

41. The current tight monetary policy stance is consistent with ongoing disinflation. The NBS inflation target is within reach. It is important not to loosen monetary policy prematurely given remaining inflation risks, including from the tight labor market. The high degree of Euroization and the importance of the ECB rate in the monetary transmission mechanism warrant holding off on rate cuts until the ECB starts to lower rates.

42. With higher public investment and the postponement of the deficit element of the fiscal rule, a prudent fiscal stance remains a priority. The new fiscal deficit path is higher than under the program and fiscal rule to allow room for higher investment under the authorities' ambitious new development plan. Public investment projects should be carefully prioritized and phased in, however, to help contain construction costs in a tight labor market. At the same time, the new fiscal path remains consistent with falling and sustainable public debt, though it could increase inflationary pressures, challenge project implementation capacity, and weigh on external buffers. These risks warrant close monitoring.

43. Greater transparency and broader public investment reforms are critically important to ensure that planned higher investment spending is cost effective. Increasing investment transparency to the public, enabling centralized project monitoring by the Ministry of Finance through PIMIS, and fully operationalizing the public investment management framework will also help underpin investment quality and cost control.

44. Pressing ahead with broader fiscal structural reforms will also help support fiscal performance. Progress on fiscal risk management is welcome. Medium-term budgeting reforms remain a priority. Further progress with expanding the central public wage registry will also help with much needed public sector wage reform going forward. Tax administration reforms should be underpinned by accelerated hiring of skilled staff to ensure adequate staffing and to protect government revenue collection.

45. Energy sector reforms have lowered sector risks and remain an important focus of the program. The removal of energy price controls for the non-regulated sectors is welcome. This should be followed by further revisions to the electricity and gas pricing systems to ensure the financial sustainability of energy SOEs and their ability to finance much-needed investment projects. Energy SOE governance reforms and restructuring need to be stepped up. Progress with diversifying natural gas supply routes is welcome.

46. Broader SOE reforms remain a priority given the important role of SOEs in the economy and the need to improve SOE governance. Close collaboration with international experts to prepare the necessary secondary legislation for the landmark SOE governance law is welcome. At the same time, staffing at the Ministry of the Economy needs to be increased to meet the Ministry's expanded responsibilities under the new laws.

47. The financial sector appears sound, yet continued vigilance is needed. Temporary forbearance measures should be allowed to lapse as scheduled and the impact on bank balance sheets be monitored. Rigorous stress testing by the NBS should continue.

48. Staff supports the authorities’ request for completion of the 3rd Review under the SBA. Staff also supports the authorities' request for new structural benchmarks and the modification of performance criteria, indicative targets, and the inflation consultation band.

Figure 1.
Figure 1.

Serbia: Regional Import Prices, 2021-241/

Citation: IMF Staff Country Reports 2024, 202; 10.5089/9798400278365.002.A001

1/ Serbia's energy imports mainly follow European prices. It also imports coal from Indonesia.
Figure 2.
Figure 2.

Serbia: Real Sector Developments

Citation: IMF Staff Country Reports 2024, 202; 10.5089/9798400278365.002.A001

Figure 3.
Figure 3.

Serbia: Labor Market Developments

Citation: IMF Staff Country Reports 2024, 202; 10.5089/9798400278365.002.A001

Figure 4.
Figure 4.

Serbia: Inflation and Monetary Policy

Citation: IMF Staff Country Reports 2024, 202; 10.5089/9798400278365.002.A001

Figure 5.
Figure 5.

Serbia: Balance of Payments

Citation: IMF Staff Country Reports 2024, 202; 10.5089/9798400278365.002.A001

Figure 6.
Figure 6.

Serbia: Fiscal Developments

Citation: IMF Staff Country Reports 2024, 202; 10.5089/9798400278365.002.A001

Figure 7.
Figure 7.

Serbia: Fiscal Financing

Citation: IMF Staff Country Reports 2024, 202; 10.5089/9798400278365.002.A001

Figure 8.
Figure 8.

Serbia: Financial and Exchange Rate Developments

Citation: IMF Staff Country Reports 2024, 202; 10.5089/9798400278365.002.A001

Figure 9.
Figure 9.

Serbia: Selected Interest Rates and Credit Development

Citation: IMF Staff Country Reports 2024, 202; 10.5089/9798400278365.002.A001

Figure 10.
Figure 10.

Serbia: Key Banking Sector Indicators

Citation: IMF Staff Country Reports 2024, 202; 10.5089/9798400278365.002.A001

Table 1.

Serbia: Selected Economic and Social Indicators, 2022-29

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Sources: NBS, Ministry of Finance, SORS; and IMF staff estimates and projections. 1/ Unemployment rate of the 15-64 year old labor force. 2/ Includes employer contributions. 3/ Includes amortization of called guarantees. 4/ Excludes state guarantees on bank loans under the credit guarantee scheme introduced in response to the COVID-19 crisis. Includes restitution bonds and publicly guaranteed debt. 5/ At constant exchange rates. 6/ The risk-weighted metric is the IMF's ARA metric under fixed exchange rate. Serbia was reclassified as a de facto stabilized exchange rate regime in 2018.
Table 2.

Serbia: Medium-Term Framework, 2022-29

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Sources: NBS, Ministry of Finance, SORS; and IMF staff estimates and projections. 1/ Using constant dinar/euro and dinar/swiss franc exchange rates for converting FX and FX-indexed loans to dinars. 2/ Includes employer contributions. 3/ Includes amortization of called guarantees. 4/ Excludes state guarantees on bank loans under the credit guarantee scheme introduced in response to the COVID-19 crisis. Includes restitution bonds and publicly guaranteed debt.
Table 3.

Serbia: Growth Composition, 2022-29

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Sources: SORS; and IMF staff estimates and projections.
Table 4a.

Serbia: Balance of Payments (Billions of Euros), 2022-291/

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Sources: NBS; and IMF staff estimates and projections. 1/ Excluding net use of IMF resources. 2/ Includes SDR allocations in 2021. 3/ Includes trade credits (net).
Table 4b.

Serbia: Balance of Payments (Percent of GDP), 2022-291/

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Sources: NBS; and IMF staff estimates and projections. 1/ Excluding net use of IMF resources. 2/ Includes SDR allocations in 2021. 3/ Includes trade credits (net). 4/ The risk-weighted metric is the IMF's ARA metric for the fixed exchange rate. Serbia was reclassified as a de facto stabilized exchange rate regime in 2018.
Table 5a.

Serbia: External Financing Requirements and Sources (Baseline), 2022-29

(In billions of euros)

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Sources: NBS, and IMF staff estimates and projections. 1/ Only includes equity securities and financial derivatives. 2/ Excluding IMF. 3/ Includes all other net financial flows and errors and omissions. 4/ Exceptional financing is provided by the World Bank, AFD, KfW, EBRD and Cassa Depositi e Prestiti (see MEFP). Some loans are disbursed to the budget and are public debt, others are disbursed to SOEs in the energy sector and are publicly guaranteed debt.
Table 5b.

Serbia: Indicators of Capacity to Repay the Fund, 2022-291/

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Source: IMF staff estimates. 1/ Assumes purchase of the full authorized access under the SBA arrangement including precautionary tranches. 2/ Includes GRA basic rate of charge, surcharges, service fees, and SDR charges.
Table 6a.

Serbia: General Government Fiscal Operations (Billions of RSD), 2022-291/

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Sources: Ministry of Finance; and IMF staff estimates and projections. 1/ Includes the republican budget, local governments, social security funds, and the Road Company, but excludes indirect budget beneficiaries (IBBs) that are reporting only on an annual basis. 2/ Includes employer contributions. 3/ Includes severance payments. Includes employer contributions. 4/ Excludes foreign currency deposit payments to households, reclassified below the line. 5/ Excludes state guarantees on bank loans under the credit guarantee scheme introduced in response to the COVID-19 crisis. Includes restitution bonds and publicly guaranteed debt.
Table 6b.

Serbia: General Government Fiscal Operation (Percent of GDP), 2022-291/

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Sources: Ministry of Finance; and IMF staff estimates and projections. 1/ Includes the republican budget, local governments, social security funds, and the Road Company, but excludes indirect budget beneficiaries (IBBs) that are reporting only on an annual basis. 2/ Includes employer contributions. 3/ Includes severance payments. Includes employer contributions. 4/ Excludes foreign currency deposit payments to households, reclassified below the line. 5/ Excludes state guarantees on bank loans under the credit guarantee scheme introduced in response to the COVID-19 crisis. Includes restitution bonds and publicly guaranteed debt.
Table 7.

Serbia: Decomposition of Public Debt and Debt Service by Creditor, 2023-251/

(Central government, in billions of euros)

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1/ As reported by country authorities according to their classification of creditors, including by official and commercial. Debt coverage corresponds to central government. 2/ Multilateral creditors” are simply institutions with more than one official shareholder and may not necessarily align with creditor classification under other IMF policies (e.g. Lending Into Arrears). 3/ Debt is collateralized when the creditor has rights over an asset or revenue stream that would allow it, if the borrower defaults on its payment obligations, to rely on the asset or revenue stream to secure repayment of the debt. Collateralization entails a borrower granting liens over specific existing assets or future receivables to a lender as security against repayment of the loan. Collateral is “unrelated” when it has no relationship to a project financed by the loan. An example would be borrowing to finance the budget deficit, collateralized by oil revenue receipts. See the joint IMF-World Bank note for the G20 “Collateralized Transactions: Key Considerations for Public Lenders and Borrowers” for a discussion of issues raised by collateral. 4/ Includes other-one off guarantees not included in publicly guaranteed debt (e.g. credit lines) and other explicit contingent liabilities not elsewhere classified (e.g. potential legal claims, payments resulting from PPP arrangements). Source: Serbia Public Debt Management Agency.
Table 8.

Serbia: Monetary Survey, 2022-291/

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Sources: NBS; and IMF staff estimates and projections. 1/ Foreign exchange denominated items are converted at current exchange rates. 2/ Excluding undivided assets and liabilities of the FSRY and liabilities to banks in liquidation. 3/ Using constant program RSD/euro exchange rates for converting FX and FX-indexed loans to RSD. 4/ Calculated as nominal credit at current exchange rates deflated by the change in the 12-month CPI index. 5/ Using current exchange rates.
Table 9.

Serbia: NBS Balance Sheet, 2022-291/

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Sources: NBS; and IMF staff estimates and projections. 1/ Foreign exchange denominated items are converted at current exchange rates.
Table 10.

Serbia: Banking Sector Financial Soundness Indicators, 2020-24

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Source: NBS.
Table 11.

Serbia: Schedule of Reviews and Available Credit Under the 2-Year SBA Arrangement, 2022-24

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Source: IMF staff 1/ Quota is SDR 654.8 million 2/ Indicative, at SDR/ EUR exchange rate of 11/16/2022: 0.791589

Annex I. Risk Assessment Matrix

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Annex II. Sovereign Risk and Debt Sustainability Assessment

Table 1.

Serbia: Risk of Sovereign Stress

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Source: Fund staff. Note: The risk of sovereign stress is a broader concept than debt sustainability. Unsustainable debt can only be resolved through exceptional measures (such as debt restructuring). In contrast, a sovereign can face stress without its debt necessarily being unsustainable, and there can be various measures—that do not involve a debt restructuring—to remedy such a situation, such as fiscal adjustment and new financing. 1/ The near-term assessment is not applicable in cases where there is a disbursing IMF arrangement. In surveillance-only cases or in cases with precautionary IMF arrangements, the near-term assessment is performed but not published. 2/ A debt sustainability assessment is optional for surveillance-only cases and mandatory in cases where there is a Fund arrangement. The mechanical signal of the debt sustainability assessment is deleted before publication. In surveillance-only cases or cases with IMF arrangements with normal access, the qualifier indicating probability of sustainable debt ("with high probability" or "but not with high probability") is deleted before publication.
Table 2.

Serbia: Debt Coverage and Disclosures

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Table 3.

Serbia: Public Debt Structure Indicators

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Table 4.

Serbia: Baseline Scenario

(Percent of GDP unless indicated otherwise)

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Table 5.

Serbia: Medium-Term Risk Assessment

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Source: IMF staff estimates and projections. 1/ See Annex IV of IMF, 2022, Staff Guidance Note on the Sovereign Risk and Debt Sustainability Framework for details on index calculation. 2/ The comparison group is emerging markets, non-commodity exporter, surveillance. 3/ The signal is low risk if the DFI is below 1.13; high risk if the DFI is above 2.08; and otherwise, it is moderate risk. 4/ The signal is low risk if the GFI is below 7.6; high risk if the DFI is above 17.9; and otherwise, it is moderate risk. 5/ The signal is low risk if the GFI is below 0.26; high risk if the DFI is above 0.40; and otherwise, it is moderate risk.
Table 6.

Serbia: Realism of Baseline Assumptions

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Source : IMF Staff. 1/ Projections made in the October and April WEO vintage. 2/ Calculated as the percentile rank of the country's output gap revisions (defined as the difference between real time/period ahead estimates. 3/ Data cover annual obervations from 1990 to 2019 for MAC advanced and emerging economies. Percent of sample on vertical axis. 4/ The Laubach (2009) rule is a linear rule assuming bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio.
Table 7.

Serbia: Long-Term Risk Assessment

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Table 8.

Serbia: Long-Term Risk Assessment

(continued)

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Annex III. External Sector Assessment

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Annex IV. Tax Administration Staffing Challenges

The Serbian Tax Administration (STA) is facing a retirement wave, which, coming on top of earlier staffing reductions, risks undermining tax collections. A comprehensive approach is needed to address this challenge, including ongoing modernization and organizational reforms, a revamped HR strategy, and appropriate wages for skilled staff. As the STA's challenges in attracting high-skilled staff are not unique, consideration could also be given to using the STA as a pilot case for addressing the needs of specialized functions and public sector entities with high-skilled labor forces in the lead-up to a wider public wage reform.

1. The STA has seen large declines in staffing over the past decade and faces a retirement wave over 2024-27. Under the retirement wave, STA is projected to lose a further 1,400—or about 40 percent—of its current permanent staff. Many of these retirees are high skilled, address the most complex tax cases, and train and mentor more junior staff.

2. The STA’s modernization program has allowed it to preserve and even increase revenue raising capacity with lower staffing levels (Table 1). Over the past decade, the STA has helped reap major efficiency gains by modernizing its operations. Filing of tax returns and revenue collection are now mostly digital, and tax assessments have been shifted to self-assessment. Most revenue is collected through regular procedures (including reminders, notifications, and reprogramming), rather than enforcement proceedings. A Large Taxpayer Office collects about 40 percent of the STA’s revenue. And E-fiscalization provides the STA with big data, and a new "Determining Sources of Wealth” unit further enhances enforcement activities.

3. The staffing levels of advanced functions are now particularly low, however, even as these functions are becoming increasingly important for revenue collections (Table 2). Staffing in many advanced functions is below 50 percent of authorized posts, including in areas such as enhanced and HQ audits; the large taxpayer unit; analysis, research, and specialized units; strategic risk, control, internal audit, and corporate and data security; and the transformation unit. These functions increasingly rely on data analytics techniques, risk assessment methodologies and digital skills, requiring highly skilled staff. In contrast, staffing levels in support functions as well as in noncore activities are higher, but still below 100 percent of authorized posts. These functions also continue to have a high share of manual tasks.

4. Recruitment of new high-skilled STA staff has been slow. The HR department has issued several job notices for blocks of about 30 candidates but hiring success rates have been low. Formalistic requirements, lengthy official procedures, low wages for junior staff, and stiff competition for talent from the private sector have been contributing factors.

5. Without further reforms, ongoing STA staffing challenges could start to undermine revenue collection. The automation of tax filing and revenue collection eliminated many manual tasks and reduced the facetime between taxpayers and tax officials. Hence, permanently lower staffing levels below currently authorized posts are anticipated. However, robust audits and analytical work exercised by well-qualified staff are essential for maintaining and enhancing high voluntary compliance levels and strong revenue performance. This requires the hiring of high-skilled staff.

6. A comprehensive approach to STA staffing challenges is, therefore, urgently needed. The transformation unit is now involved in strategic HR planning.

  • Ongoing modernization should continue apace. The planned procurement of an off-the shelf tax administration IT system (COTS) will further eliminate manual tasks, enhance automation, and support modern business processes and data analytics. Consistent with the new business processes, the organizational structure of STA (HQ vs. branches), the number of staff, and the deployment of staff across functions will need to be realigned.

  • The STA's HR Strategy needs to be further strengthened. The STA has already successfully redeployed staff, and further redeployments are anticipated. In addition, retraining and upskilling of existing staff could not only benefit the STA but also provide opportunities for career advancement. But new hiring is critical, and new staff should bring skills relevant for the future vision of the STA.

  • The STA recognizes that immediate actions are needed to improve cooperation with the government-wide agencies in charge of hiring procedures. In addition, the STA is planning an advertisement and information campaign, which will be critical in helping to mark the STA as an attractive employer to prospective employees.

  • To permit hiring and deployment of suitably qualified staff, the STA's position rule book needs to be modified and made more flexible. Initially the rule book should be simplified and streamlined to provide flexibility during the transition phase. Once the COTS has been implemented, a further review of roles and responsibilities would support the full implementation of the new business processes.

  • The wages of high skilled STA staff also need to be reviewed and increased as needed. The STA's average wage has been broadly flat relative to the minimum wage, even though the tax reforms and modern tax administration practices demand more of each staff.

  • The STA's budget should be increased, as a larger share of high-skilled staff will increase the average wage paid by STA. A budget increase would restore previous budget levels because the STA's budget as a share of GDP has decreased over the years in line with lower staff levels (Table 1).

7. The government could also consider using the STA as a pilot case for trialing new approaches for hiring of high-skilled staff in specialized functions or entities ahead of a wider public wage reform. While increasing the wage level for skilled staff is likely needed for maintaining sufficient staffing levels in STA, this decision is outside of the remit of the STA. A time-limited derogation from standard government employment rules could be considered, but would need to be handled carefully, because consistency of hiring and compensation conditions across government entities is important for a well-functioning administration. That said, challenges in hiring and retaining high-skilled and specialized staff have become apparent throughout the government. As the STA's revenue collection function is macro critical, the government could use the organizational and staffing transformation of the STA as a pilot project for developing new approaches to employment terms and conditions for similarly situated specialized entities and functions.

Table 1.

Serbia: Tax Administration Key Data, 2015-2023

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Table 2.

Serbia Tax Administration: Staffing Levels and Composition, 2023

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Source: Serbia Tax Administration (STA). 1/ Includes fixed term, trainee, and contractual staff

Appendix I. Letter of Intent

Belgrade, June 7, 2024

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C., 20431

U.S.A.

Dear Ms. Georgieva:

The Serbian economy has been performing well despite the challenging global and regional environment. Macroeconomic outcomes in 2023 exceeded expectations. Growth has been picking up and the labor market remains resilient. Inflation is declining and is expected to fall within the inflation tolerance band by mid-2024. Supported by lower energy prices and increased exports, the current account deficit has narrowed significantly, and, with strong FDI inflows, foreign exchange reserves are at a record high. With strong revenue growth and falling energy subsidies, the fiscal deficit has narrowed. Financial stability has been maintained and close monitoring of the financial sector continues.

Our economic program, supported by the Stand-By Arrangement (SBA) that was approved by the IMF Executive Board on December 19, 2022, aims at preserving macroeconomic and financial stability, boosting the economy's resilience to energy shocks, and fostering higher, greener, and inclusive sustainable growth over the medium term. Performance under the program remains strong. All end-December 2023 QPCs were met. The standard continuous performance criteria and other indicative targets were also met. The structural reform agenda has been progressing, although there were delays in implementing the end-January 2024 structural benchmark (SB) on approving a new gas pricing system for the nonregulated sector and May 1, 2024 SB on EPS restructuring plan.

In the attached update to the Memorandum of Economic and Financial Policies (MEFP) of December 1, 2022, we reiterate our commitment to the policies and objectives of the SBA-supported economic program and update the reform agenda that we intend to implement in 2024.

Considering our strong performance under the program, we request completion of the Third Review under the SBA, which would allow us to purchase the equivalent of SDR 316.46 million (48.33 percent of quota) in addition to the amounts available after the completion of the 2nd Review under the SBA (SDR 316.53 million, 48.34 percent of quota). Given our success with reducing macroeconomic imbalances, accumulating significant reserve and fiscal buffers, and strong balance of payments financing, we will continue treating the SBA as precautionary. We will only consider making purchases if the balance of payments deteriorates materially.

Our program will continue to be monitored through quantitative performance criteria, standard continuous conditionality, structural benchmarks, and an inflation consultation clause, as described in the MEFP and the Technical Memorandum of Understanding (TMU). We also request modifications to our program. We request for modification of: (1) the net international reserves (NIR) floor be raised to 100 percent of the ARA metric on gross international reserves; and (2) the inflation consultation band in accordance with latest inflation projections. We also propose two new structural benchmarks in the area of public investment management and gas prices be set as outlined in the attached MEFP.

Reviews by the IMF will continue to be conducted on a semi-annual basis to assess program implementation and to reach understandings on any further program reforms needed. While we believe that the policies set forth in the MEFP are adequate to achieve the economic objectives under the program, we will promptly take any additional measures that may become necessary for this purpose. We will also consult with the IMF in advance of any revisions to the policies contained in our MEFP or any new policies that may affect program objectives, in accordance with the IMF's policies on such consultations; and we will provide IMF staff with all the data and information necessary for the purpose of monitoring the program.

In line with our commitment to transparency, we intend to make this letter available to the public, along with the MEFP, TMU, and the IMF staff report for the Third Review Under the SBA. We therefore authorize their publication and posting on the IMF website, subject to Executive Board approval. These documents will also be posted on the official website of the Serbian government.

Sincerely,

Attachments: Memorandum on Economic and Financial Policies Technical Memorandum of Understanding

Attachment I. Memorandum of Economic and Financial Policies

1. This memorandum supplements our memorandum of December 1, 2022, provides information on recent developments, and presents our economic program for the remainder of 2024. The program aims to: (i) preserve macroeconomic and financial stability by tailoring our policy response to ongoing economic shocks; (ii) boost the economy's resilience to energy shocks by pursuing approriate energy policies and reforms to tackle domestic energy sector challenges, while protecting the most vulnerable; and (iii) foster higher, greener, and inclusive sustainable growth over the medium term by implementing comprehensive structural reforms. The goals of the program are compatible with our aspirations to join the EU.

Recent Economic Developments and Outlook

2. Serbia’s macroeconomic performance in 2023 exceeded expectations and is expected to remain strong.

  • Growth. Real GDP increased by 2.5 percent in 2023. While in 1H2023 growth was driven by net exports on account of rising goods and services exports and falling imports, in 2H2023 the main growth drivers were investment and private consumption. On the production side, growth was driven by construction, agriculture, and industry. We expect growth to increase to 3.5 percent in 2024 and to be driven by domestic demand. Private consumption will be supported by continued employment and wage growth, while investment growth will be supported by the implementation of projects in transport, energy, and utility infrastructure. We expect economic growth to increase further in the years to come to about 4 to 5 percent, including because of large public investment outlays in the lead-up to hosting Specialised Expo 2027 under the theme "Play for Humanity: Sport and Music for All.”

  • Inflation. Headline inflation has been falling since April 2023, dropping to 5 percent in April 2024. This disinflation reflects subsiding cost-push pressures, the base effect for food prices, and the effects of past monetary tightening, which also brought core inflation down to 4.8 percent y-o-y in April 2024. We project inflation to fall to within the target band in the next few months and approach its midpoint of 3 percent by the end of the year. The effects of past monetary tightening, subsiding global cost-push pressures, the deceleration of imported inflation, and falling inflation expectations are also expected to contribute to falling inflation. This said, we will continue to monitor inflation developments closely adjusting policies as needed.

  • Balance of payments. The current account deficit fell to 2.6 percent of GDP in 2023, reflecting an improved energy balance, a buoyant trade balance due to robust manufacturing exports and lower imports on account of lower import of energy and subdued domestic demand early in the year, and continued rapid growth in service exports. As in previous years, the current account deficit was more than fully covered by net FDI, supporting the sustainability of Serbia’s external position and contributing to significant foreign reserve accumulation. For 2024, the current account deficit is projected to widen to nearly 4 percent of GDP as private consumption and public investment pick up. We expect this wider current account deficit to continue to be more than fully covered by net FDI inflows.

  • Fiscal outcome. The fiscal deficit in 2023 was 2.2 percent of GDP, better than the 2.8 percent deficit planned under the supplementary budget. This reflects primarily revenue overperformance, especially in VAT, and lower-than-planned current expenditure, mostly on outlays for wages and subsidies. As a result, general government public debt declined to 52.3 percent of GDP in 2023. For 2024, the National Assembly approved the budget in line with the program consolidation path and consistent with a 2.2 percent of GDP fiscal deficit, which would reduce public debt further to about 52.1 percent of GDP.

3. Risks to the outlook appear to be broadly balanced. Key risks from the international environment include the global growth outlook, the persistence of core inflation globally and, by extension, the duration of monetary policy tightening by major central banks. Geopolitical tensions, and global energy and primary commodity prices also represent risks. When it comes to domestic factors, the risks to the projections are associated with the pace of rebound in domestic demand, FDI inflows, the pace and growth impact of investments in the energy sector and infrastructure, as well as the outcome of the agricultural season.

4. Serbia has built up considerable buffers against uncertainties. These buffers include substantial foreign exchange reserves and public sector deposits, relatively low public debt, sustainable external and public debt dynamics, and a well-capitalized and liquid banking system. Another important anchor is Serbia's attractiveness as a destination for diversified FDI, reflecting its strong macroeconomic track record and its agile policy responses to shocks. The Stand-By Arrangement provides an additional buffer, while we adjust policies and implement reforms to move beyond the crisis and strengthen the economy's performance and its resilience. Serbia's mediumterm outlook remains favorable, supported by our commitment to continued responsible macroeconomic policies and an ambitious structural reform agenda.

Economic Policies

5. We continue to monitor domestic and external developments closely and stand ready to tailor our policy responses as needed. In the context of earlier sharp increases in food and global energy prices, we introduced a set of administrative measures to cushion the impact of price shocks on Serbia's households and firms. Currently, we have in place price regulations on gasoline and diesel, as well as on one type of bread and wheat flour. In 1H2024, we also introduced import quotas on margarine and sunflower oil, for the duration of 9 months, and a temporary ban on the import of wood pellets (90 days). These administrative measures are temporary and of limited scope with the goal of moderating social and economic strains.

A. Energy Sector Policies

6. We are committed to addressing the deep-rooted weaknesses in Serbia’s energy sector by continuing to implement a comprehensive set of much-needed reforms. Our policy decisions under the IMF-supported program have been critical for ensuring energy security and for maintaining fiscal and external sustainability.

7. The series of electricity tariff increases in 2022-23 helped achieve cost recovery of the state-owned electricity company EPS. In a rebound, due to the policies implemented during the crisis period and favorable conditions for hydroelectric generation and exports, EPS achieved high profits in 2023. These profits were partly used to repay liquidity and investment project loans, thereby improving future cash flow. We are working now on ensuring the ongoing sustainability of the electricity supply pricing system.

  • Starting from May 1, 2024, we removed the fixed electricity price for the non-regulated sector that was introduced during the energy crisis. This removal had to be brought forward as regional electricity prices fell well below the fixed price and revived competition in Serbia's electricity sector. While these price decreases reduce EPS' revenues, expected margins under current pricing methodologies remain sufficient to cover all operational costs and other cash flow requirements.

  • In the meantime, EPS has been working on developing a new electricity supply pricing system for the non-regulated sector, which will become effective with the consent of the General Assembly of the EPS (i.e., the Minister of Mining and Energy) as of November 1, 2024 (end-August 2024 SB). The price system may include elements that help shield consumers from excessive short-term volatility in electricity markets to maintain Serbia's strong international attractiveness as an investment destination.

  • In parallel, we have been conducting a holistic analysis of the electricity supply pricing system (for the regulated and non-regulated sectors, as well as for the prices paid by the electricity distribution company EDS for technical losses). The aim of the analysis is to determine how to revise the system to contain the risks associated with major cross subsidization between the non-regulated and regulated sectors and ensure that the average electricity supply tariff across all consumer groups continues to cover the total cost of electricity supply (operational expenditure, maintenance capital expenditure and capital investment in new capacity).

8. The gas tariff increases in 2022-23 helped improve the financial situation of Srbijagas. We are working now on ensuring the full sustainability of the gas pricing system.

  • We are committed to establishing a new gas pricing system for the non-regulated sector that will ensure financial health of Srbijagas and its ability to finance much-needed investment projects.

    • - While we yet to fully deliver on end-January 2024 SB to approve by the government a new gas pricing system for the non-regulated sector, we already removed gas price controls for the non-regulated sector starting from May 1, 2024. As a result, as of May 1, the pre-energy crisis Srbijagas methodology for the gas price calculation for the non-regulated sector using a market-based formula is back in effect.

    • - We also adopted a Government Conclusion on April 11 that remedies the financial impact on Srbijagas of the extraordinary high costs of gas procured for the Hungarian storage during the energy crisis. It involved revaluing the gas in storage in Hungary using May 1, 2024 market prices and compensating Srbijagas by reducing its outstanding liabilities towards the Republic of Serbia by 275 mln EUR. We will also repay two Srbijagas loans with state guarantee in 2024 (EUR 110,5 mln) and 2025 (EUR 106,3 mln) that were contracted during the energy crisis to address urgent liquidity needs associated with large differences between imported and domestic gas prices. This transaction will be recorded as an expenditure in the fiscal accounts of the Republic of Serbia.

    • - Considering the substantial decrease in gas prices for the corporate sector after May 1, we will conduct an analysis to review the adequacy of the margin (currently set at 5 percent on average) that is featured in Srbijagas' pricing methodology and assess whether any increase is warranted to accommodate much-needed investment over the coming years. The Srbijagas methodology for gas price calculation for the non-regulated sector will be updated to reflect the results of the analysis and will come into effect on August 1, 2024 (new end-July 2024 SB).

    • - Separately, we plan to develop a system that would help shield consumer prices from excessive short-term volatility in gas markets to maintain Serbia's strong international attractiveness as an investment destination.

  • The SBA includes a consultation clause in case market prices for gas exceed EUR 250/MWh, on average, during a two-week period, to initiate a discussion on an appropriate policy response, if relevant, and help contain risks to the budget. Current market prices fall well short of this price.

9. We continue to strive to ensure energy affordability for Serbia’s population. We will continue to rely on a system of block tariffs, with a lower electricity price for households up to a certain electricity consumption threshold. We have succeeded in significantly expanding the uptake of the energy-vulnerable consumer protection program that features increased eligibility criteria by expanding the program to pensioners with minimum pension and to the recipients of mean-tested social assistance program. By end-December 2023, the number of households with the status of an energy vulnerable customer increased by about 100,000 to around 170,000 in total.

10. We are committed to implementing reforms to address remaining deep-rooted structural weaknesses in the energy sector. We have involved consultants to help with these reforms. We are also set to benefit from access to loans from official creditors including the EBRD, the KfW, and Cassa Depositi e Prestiti (CDP) for liquidity support to the energy companies as we transform the energy sector.

  • We have prioritized the restructuring of the large state-owned energy companies to enhance efficiency and contain fiscal costs and risks. In April 2023, we changed the legal status of the EPS to a joint stock company aiming to professionalize its management and strengthen the company in the long term. Subsequently, we appointed the new EPS Supervisory Board, which includes international and domestic experts. The selection process for a new CEO by the EPS Supervisory Board through a transparent recruitment procedure has been delayed, however. The appointment will take place once a suitable candidate is found. For Srbijagas, we will ensure completion of its unbundling by end-2024. In this regard, following the amendments to the Energy Law that call for the establishment of an independent commission that would oversee the transmission system operator for gas (Transportgas), the company submitted a request to the Energy Agency of the Republic of Serbia for the decision on certification, expected by July 2024. The decision on certification by the Energy Agency of the Republic of Serbia will be followed by the approval of the certification from the relevant EU authorities expected by end-2024.

  • We have delivered a strategic restructuring plan for EPS (May 1, 2024 SB) with a minor delay due to interruptions from a cyber-attack on EPS IT systems. The plan, which is needed to address EPS's many problems, specifies reform priorities in EPS governance and organizational structure, including managerial and sectorial layouts, audit processes, internal controls, and compliance procedures. To ensure ownership and accountability, the Supervisory Board and the Executive Board have been closely involved in the development of all operational elements of the EPS restructuring plan (organizational and financial restructuring, human resources, procurement, investment project development, reporting, risk management and environment) with the consent of the General Assembly (i.e., the Minister of Mining and Energy), in line with the EPS Statute.

  • In line with our commitment to transparency, we will publish all strategic and financial plans for EPS and Srbijagas. We will also continue with the publication of monthly reporting of overdue receivables to Srbijagas and EPS from their top-20 debtors including changes in overdue receivables since January 2022.

  • We will implement governance reforms in the state-owned electricity distribution company EDS in line with the new Law on SOE governance (A42). In the meantime, we will continue monitoring the adequacy of grid fees paid to EDS.

  • We plan to adopt the Integrated National Energy and Climate Plan (INECP) before the adoption of the new Energy Development Strategy of the Republic of Serbia. The draft INECP defines the goals of the Republic of Serbia for reducing greenhouse gas emissions, increasing the share of renewable energy sources (RES) in gross final energy consumption, and setting goals for greater energy efficiency in line with the new Energy Development Strategy of the Republic of Serbia. We have already received comments from the Energy Community Secretariat and integrated into the draft INECP the explanations for the deviation of the proposed RES goal from the energy and climate goals of the Energy Community for 2030.

  • The new government will adopt a new Energy Development Strategy of the Republic of Serbia. The draft strategy has already been prepared; public consultations will take place as an early action by the new government.

  • We will continue facilitating higher private investment in renewables through auctions and other measures, and the next wind and solar auctions are planned for 2H2024 and 2H2025.

  • We will send for approval the amendments to the Law on Energy to introduce a new concept of active consumers for those who want to install more own generation capacity while delivering some electricity to the grid.

B. Fiscal Policies

11. We commit to delivering a 2024 fiscal deficit in line with program understandings and the approved budget of no more than 2.2 percent of GDP. A program to provide birth grants of RSD 5 bln to new mothers (0.05 percent of GDP) will be accommodated within the approved expenditure envelope. Revenue overperformance and underutilized contingency reserves in the budget may be used to further increase capital spending above the budgeted envelope of about 7 percent of GDP to address Serbia's sizeable infrastructure needs, including those related to the Specialised Expo 2027. A supplementary budget is expected to be presented in September 2024 which inter alia will regularize the alignment of the budget with the organization of ministries following the formation of the new government.

12. Our fiscal financing strategy for 2024-25 relies on domestic and external sources. It relies on borrowing domestically and internationally, drawing on the government's cash deposits, and borrowing from our international and bilateral partners, including for project financing. High government cash deposits provide a robust buffer. Since the external environment remains relatively supportive, we will continue treating the SBA as precautionary. Financing for the 2024 budget has already been secured. Further issuances of debt securities in 2024 aim to pre-fund the 2025 budget, and to maintain presence in domestic and international markets. We aim to increase the share of dinar-denominated debt (securities and loans) above 30 percent over time, and recently issued another 8-year benchmark bond, which was well-received. On international markets, we plan to issue more after preparations are completed and when market conditions are favorable. Reflecting ongoing strong fiscal performance, public debt is expected to fall to about 52.1 percent of GDP by end-2024.

13. We will continue to contain fiscal risks and prepare contingency measures as needed. We will continue to closely monitor revenue and expenditure risks related to ongoing external and domestic challenges. We will maintain strong liquidity buffers and will not accumulate public sector external debt payment arrears (continuous performance criterion). We will also refrain from accumulating domestic payment arrears (indicative target). Our efforts to contain public spending will continue to be monitored through a program ceiling on current primary spending of the Republican budget, excluding capital spending and interest payments (quantitative performance criterion). Increases in pension spending will strictly follow the annual indexation mechanism defined in the pension law and we will refrain from ad hoc pension increases and cash payments to pensioners (Structural Benchmark, continuous). Any financial support to public enterprises will be delivered in a transparent and timely manner and channeled through the government budget. The liquidity of the state-owned enterprises in the energy sector has improved significantly, and these SOEs will not require any additional liquidity support in 2024 and beyond. In case these SOEs will have to rely on budget support for liquidity, we will reassess our energy sector policies accordingly.

14. We are committed to strictly limiting the issuance of state guarantees. Apart from providing state guarantee for an EPS liquidity loan from Cassa Depositi e Prestiti for EUR 100 million, we will not issue any new state guarantees in 2024 for liquidity support to the SOEs, or state guarantees for any company in the portfolio of the former Privatization Agency. The Government will also refrain from issuing any implicit state guarantees. We will continue to issue guarantees for project loans provided by multilateral financial organizations in support of our investment and reform agenda.

15. We are committed to maintaining fiscal discipline over the medium term. We plan to maintain low fiscal deficits in the coming years and keep public debt on a declining path, an important goal that further builds fiscal buffers and allows for room to deal with future shocks. For 2025, we will increase the fiscal deficit to 2.5 percent of GDP to accommodate the important investment projects under the "Leap into the Future—Serbia 2027" development plan as well as the newly agreed national security expenses. For 2026 and beyond, we now target a fiscal deficit of no more than 2% percent of GDP. We will delay the implementation of the fiscal deficit component of the fiscal rule until 2029, when we complete the new investment cycle and fully pay for certain new national security equipment. To help support growth, we will continue to prioritize essential capital spending, focusing on high-priority and productive investments, while containing current spending. To support a high quality of our investment spending, we will accelerate our public investment management reforms (see below).

C. Structural Fiscal Policies

16. We will continue working on upgrading fiscal data and government finance statistics (GFS). Upcoming upgrades to fiscal data and government finance statistics (GFS) will require a review of the numerical parameters of the fiscal rule. With Fund technical assistance (TA) support, we are working on automating the preparation of monthly GFSM 2014-compliant fiscal data, expanding the coverage of indirect budget users and extrabudgetary units to all materially relevant general government units, and developing data for the compilation of financial accounts. We have formed coordination committees between SORS, the MoF and the NBS to ensure smooth coordination between all participating government bodies. Moreover, comprehensive improvements to the GFS are expected with the next 5-yearly revision of national account statistics in 2024. We will accordingly update fiscal rule definitions and parameters in the Budget System Law to align them with statistical definitions, revisions to the national accounts and other improvements to fiscal data (end-November 2024 SB). A bylaw to the Budget System Law prescribes the timeline and methodology for inclusion of entities into the General Government. We have prepared a first draft of a conceptual note on our fiscal data and will further refine this note, so it provides a good overview of our upgraded fiscal data and the calculation of the fiscal deficit and public debt. We also plan to align our debt reporting with the revised fiscal data coverage. As a first step, we have developed new debt reporting templates supported by IMF TA.

17. We will continue to enhance public financial management (PFM). We have been working on strengthening the medium-term budgetary framework, so that we could complement our focus on annual budgets with a medium-term perspective. In September 2023, we adopted an Action Plan for Improving Medium Term Budget Framework in line with IMF recommendations (end-July 2023 SB) to make medium-term budgeting more effective and binding beginning from 2025, and to increase transparency of information for improved accountability. Recently, we have been analyzing the baseline estimation methodology, its rationale and general principles, as well as international experience with baseline estimates, and aim to apply improved baseline estimation practices already in preparing the 2025 budget. We will continue to ensure strict adherence to the budget calendar and to the transparency of the budget process by, among other things, expanding the content of our within-year budget reports. In December 2023, we also adopted the methodology and the roadmap for introducing green budgeting.

18. Strengthening the role and capacity of the Fiscal Risks Monitoring Department (FRMD) at the MOF remains an important objective.

  • We have been working on operationalizing the use of the methodologies to monitor fiscal risks stemming from SOEs, local governments, litigation, and natural disasters. We have also been working to improve and standardize our reporting in line with the methodologies.

  • We have further strengthened fiscal risk reporting in the Fiscal Strategy for 2025-27 released in June 2024 and will further improve reporting in future strategy documents.

  • We will continue using the methodology that was developed with IMF TA support for managing fiscal risks associated with the state-guarantee schemes.

19. We are further strengthening our public investment management (PIM) practices to support strong project preparation, selection, and implementation.

  • We prepared all the necessary secondary legislation, rule books and forms to make operational the new Decree on Capital Projects that was adopted in September 2023. The goal of this new decree is to establish a single project pipeline to cover all ongoing and future capital projects and to comprehensively regulate procedures for selecting and monitoring capital projects to deliver more efficient spending of budget funds, as well as ensuring their strategic relevance. The Decree introduced various changes, including (1) the competences of the Republic Commission for Capital Investment were reinforced in terms of project selection and prioritization, and the Sub-commission was introduced as an auxiliary body which considers project ideas/projects that are financed or co-financed from EU funds, funds of some other countries or international institutions; (2) indicators for environmental impact assessments were integrated into the PIM process; (3) the project cycle was aligned with Serbia's budget calendar; (4) requirements for project documentation were strengthened; (5) a requirement for ex-post evaluations of the realized capital projects was introduced.

  • The new Public Investment Management Information System (PIMIS), that became operational on June 1, 2023 for projects under implementation, is being upgraded to make it consistent with the new regulation and to incorporate projects in the pre-implementation phase starting from the project idea stage. In April 2024, we sent a circular to all line ministries regarding the upgraded version of PIMIS and their obligations thereon. We will expand PIMIS's usage to the national level by mid-2024 and aim to include local and provincial capital projects in PIMIS in 2025.

  • We will continue strengthening the capacity of the PIM unit by hiring new employees and training existing employees.

20. In light of the scaling up of the investment budget, and acceleration of the implementation of some existing projects, we are committing to enhancing transparency around our public investment projects.

  • We will include in the Revised Fiscal Strategy for 2025 with Projections for 2026 and 2027 a table that incorporates the following information for budgeted public investment projects with estimated costs exceeding EUR 20 million apart from those related to defense and security: project expenditure to date; spending estimate for current year, budgeted amount for the budget year; expenditure projections for two outer years; and estimated total project cost (new end-November 2024 SB). We will incorporate the requirement for the publication of this data into the Budget System Law during its next revision, expected not later than November 2024. This is broadly in line with our commitment to increase transparency of capital investment projects, as outlined in the action plan for improving medium term budget framework that was adopted in 2023.

  • We will ensure that each Ministry and public entity in charge of budgeted investment projects publishes on their websites project appraisal studies for the signed investment projects that have a total value of over EUR 20 million unless this is precluded by the confidentiality clauses in government-to-government contracts or commercial contracts.

  • We will upgrade the website Srbija 2027 to provide additional information on the scope, phasing, benefits and estimated costs of the projects under the "Leap into the Future—Serbia 2027."

  • Public Procurement Office will continue regular public reporting - annually at a minimum - on all procurements, including those that were exempted from the regular procurement regime, and disclosing the basis for the exemptions.

21. For the next phase of projects that have not yet been signed or budgeted, we are committing to applying fully our existing and recently strengthened PIM regulations to support robust project preparation, prioritization, and selection:

  • We will ensure full implementation of the strategic relevance assessments of projects in line with the Decree on Capital Projects.

  • We will adhere to the single pipeline of investment projects, from the project idea stage, and project monitoring by the PIM unit of the Ministry of Finance in line with the project-size thresholds defined by the new Decree on Capital Projects and other regulations.

  • The selection of projects will be supported by assessments provided by the Public Debt Administration, Ministry of Finance (Macro-financial analysis and Budget departments), and Ministry of European Integration related to affordability and alternative financing options.

  • We will continue informing the Commission on Capital Investments of public private partnership (PPP) projects. Provincial Commission and Local Commission will submit biannual reports on their work to the Ministry of Finance, which contain basic information about capital projects within their competence.

  • We will continue including all project loans of the general government in the budget.

22. We remain committed to further modernizing our tax administration in line with our 2021-25 Transformation Program. This program provides strategic guidance in modernizing the tax administration by increasing our use of electronic business processes, improving taxpayer services and fostering a risk-based approach to compliance. Our reforms will reflect the updated Tax Administration Diagnostic Assessment Tool (TADAT) review and will continue to be supported by IMF TA and the World Bank Tax Administration Modernization Project.

  • We successfully introduced a new e-fiscalization model in May 2022 and an electronic invoice exchange system in early 2023. We see that general taxpayer compliance has increased and audit selection of non-compliant taxpayers is significantly improved.

  • Despite diligent efforts, the tender for procuring a new commercial-off-the shelf-system (COTS) system was unsuccessful. We are now assessing our options for next steps. With FAD TA we will review the proposed "To Be” business processes. Under the World Bank Tax Administration Modernization Project we will proceed with procuring some IT systems that are independent of the COTS procurement and that will deliver urgent efficiency improvements. This includes an HR Management Information System (HRMIS), and some IT systems for document management and/ or records management.

  • We continue to work on addressing data gaps and adjusting analytical tools to improve VAT gap estimations to better identify sources of non-compliance.

  • Our dedicated unit to analyze the level of noncompliance of high-net-worth individuals has launched the first audits and issued an assessment for the first case. This assessment is currently under appeal, with the taxpayer mostly contesting the size of the assessment and penalties rather than the underlying taxable events. We expect to issue further assessments soon, which will have a positive impact on general taxpayer compliance of high-net-worth individuals. Our legal framework envisages that taxes on previously non-reported assets arising from legal activities will be assessed according to the standard tax regime plus interest, while taxes on nonreported assets where the origin cannot be documented will be taxed at a rate of 75 percent.

  • Developing a new HR strategy for the tax administration and accelerating hiring procedures is a top priority given increasingly precarious staffing levels at the STA in recent years. With an impending retirement wave and the ongoing shift to higher skilled work, it is imperative to hire new skilled staff urgently. We have finalized a thorough analysis of the drivers of the hiring bottlenecks, which include complex hiring procedures and low salary levels. To increase awareness and position the STA as an employer of choice, we are developing a public marketing campaign. Moreover, we will develop a comprehensive capacity building program aimed at enhancing the skills and capabilities of STA staff. Additionally, we will draft proposals and improvements for the Rulebook on salaries to ensure fair and competitive compensation structures. Within the four-year workforce engagement plan, we will create a draft framework for the Annual employment plan.

23. The phased establishment of a central electronic public wage and employment registry is at the final stages. This central registry Iskra will allow for better planning, executing, and controlling of wage spending. The system already covers: (i) direct budget users; (ii) the judicial sector; (iii) the cultural sector; (iv) the labor employment and social affairs sector; (v) the education sector apart from higher education institutions; and (vi) the health sector (the last of which was an end-January 2024 SB). Implementing the final phase for local self-government units with indirect beneficiaries (preschool institutions, cultural institutions, social welfare institutions) is expected in the last quarter of 2024. Coverage of the remaining public employees (Ministry of Defense, Ministry of Internal Affairs, Security Information Agency BIA and higher education institutions) will be completed by 2027. The Iskra system will play an essential role in designing and implementing a comprehensive reform of the public wage system, which is becoming increasingly important, as wage compression and competition from the private sector make it increasingly difficult to attract essential high skilled employees such as engineers, IT specialists and managers to the public sector.

D. Monetary and Exchange Rate Policies

24. The primary objective of the NBS’s monetary policy is to achieve and maintain price stability. This plays a crucial role in contributing to economic and financial stability and in fostering sustainable economic growth. An important pillar of this objective is the relative exchange rate stability of the domestic currency vis-a-vis the euro. The National Bank of Serbia (NBS) stands ready to use all available policy instruments to deliver on its objectives.

  • Our existing policies are consistent with the objective of keeping inflation on a declining path and bringing it within the NBS's tolerance band (3 percent ±1/ percentage points) in the next few months and to the target midpoint by end-2024. We tightened monetary conditions since 4Q2021 in a gradual and continuous fashion, at first by tightening liquidity conditions, and afterwards by raising the key policy rate by 550 bps cumulatively from April 2022 to reach 6.50 percent in July 2023. We also raised the interest rates on deposit and lending facilities to 5.25 and 7.75 percent, respectively. During subsequent monetary policy committee meetings, we kept the key policy rate unchanged given the continued easing of global inflationary pressures and the downward path of domestic inflation and its expected return within the target tolerance band in mid-2024. We also took into account the past increases in the key policy and required reserve rates.

  • The NBS will continue to monitor and analyze the movement of key inflation factors in the domestic and international environment and make decisions depending on projected inflation movements.

  • We will continue to sterilize the dinar liquidity that has been injected mainly through foreign exchange purchases.

  • In the context of the SBA, inflation developments will continue to be monitored through a consultation clause with consultation bands set around the program's central inflation projections (Table 1a). As envisaged by the TMU (A21), in case of deviations we will discuss with the IMF staff the reasons for the deviation and the appropriate policy response.

25. We are committed to sustaining relative exchange rate stability through this period of heightened uncertainty. With this in mind, we have been accumulating gross international reserves, which stood at EUR 25.1 billion at end-April 2024. We are committed to maintaining gross international reserves well above the revised NIR floor under the program, equivalent to 100 percent of the ARA metric on gross international reserves, as improved macroeconomic and external conditions have contributed to a comfortable reserve buffer that supports our commitment to sustaining relative exchange rate stability.

26. Promoting dinarization remains an important objective. Our dinarization strategy has three pillars: (i) maintaining overall macroeconomic stability; (ii) creating favorable conditions for developing the dinar bond market; and (iii) promoting hedging instruments.

  • In March 2024, deposit dinarization reached 43.4 percent, while dinarization of receivables rose to 35.2 percent. Dinar savings of households reached a new record high level of RSD 152 bn. This reflects confidence in the domestic currency and the banking system. Higher interest rates on dinar savings compared to foreign currency savings and a more favorable tax treatment also contribute to the greater attractiveness of dinar savings.

  • Beyond pursuing policies that support macroeconomic stability, several specific measures to foster dinarization have been put in place, such as lower reserve requirements rate on dinar sources while paying remuneration on reserve requirement allocation in dinars, mandatory down-payment ratios for FX loans, and systemic risk buffers. As planned, in June 2023, we adopted higher capital requirements on banks' new FX-indexed lending to corporates disbursed from July 2023, with deduction of capital starting from January 2025.

  • In an important move, we have finalized the legal framework for auctioning dinar-denominated securities through Euroclear. We plan to launch the first auction through this system in 2024, subject to market conditions and investor interest.

27. During the Fund-supported program period we will not impose or intensify restrictions inconsistent with the IMF’s Articles of Agreement. Specifically, we will not, without IMF approval, impose or intensify restrictions on the making of payments and transfers for current international transactions, nor introduce or modify any multiple currency practices or conclude any bilateral payment agreements that are inconsistent with Article VIII of the IMF's Articles of Agreement. Moreover, we will not impose or intensify import restrictions for balance of payments reasons (Table 1b).

E. Financial Sector Policies

28. Maintaining financial stability is a key priority and we will therefore continue to monitor risks in the banking sector closely. The banking system remains stable owing to adequate capitalization, ample liquidity, and strong profitability. Banks' average capital adequacy ratio stood at more than 21 percent in March 2024, well above the regulatory prescribed minimum of 8 percent. Liquidity and profits were similarly strong.

29. In 2022-23 the NBS introduced regulations to address the impact of shocks and to preserve financial stability and support the economy and its citizens. The measure that allowed the rescheduling of principal payments on agricultural loans by six to twelve months and a temporary measure to ease repayment conditions of housing loans expired.

  • In June 2022, the NBS adopted a regulation enabling banks to mitigate the negative effects of the change in government bond 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, which was then extended. The measure is set to expire at end-2024. In the meantime, we amended the measure so that the amounts banks may exclude from the calculation of CET 1 capital will gradually decline (from 70 percent to 50 percent on the reporting dates of March 31 and June 30, 2024, and further to 25 percent on September 30 and December 31, 2024).

  • In September 2023, the NBS adopted a temporary measure capping the interest rate for firsttime users of variable rate housing loans of up to EUR 200,000 to preserve the stability of the financial system, to prevent an increase of NPLs in the mortgage portfolio, and to protect citizens in the uncertain environment of fluctuating interest rates. This temporary measure is operational until end-2024. The cap is set at 4.08 percent for loans approved by end-July 2022 and at the initial interest rate for loans approved since July 2022 if the interest rate is above 4.08 percent. For newly-issued loans, banks' margins are capped at 1.1 percent until end-2024, while fixed interest rates are capped at 5.03 percent. The same decision temporarily abolishes early repayment fees for housing loans. The measure is set to expire at end-2024.

  • In December 2022, through the Decision Amending the Decision on Capital Adequacy of Banks, we adopted a permanent measure enabling banks to restructure their receivables from financially-distressed natural persons in respect of consumer, cash, or similar loans by extending the maturity of these loans by up to three years relative to the current regulatory arrangement. Restructured loans under the Decision will be accorded stage 2 treatment under IFRS9.

30. We will continue to strengthen financial sector regulatory and supervisory frameworks to fully align them with international standards. We continue to enhance the prudential framework for banks and insurance companies to ensure full compliance with international standards and EU requirements. We will further harmonize our financial legal framework with the EU acquis, considering the specificities of the Serbian financial market. With this in mind, we finalized a gap analysis of the domestic legal framework for banks with those in the EU and established a comprehensive and modern legal framework for liquidity risk management in banks, which encompasses the introduction of the Net Stable Funding Ratio (NSFR) indicator and the adoption of the new Decision on Liquidity Risk Management by Banks. As a next step, we will work on introducing the regulatory limit for the leverage ratio for banks and thereafter prudential reserves.

31. NPL ratios remain low, but we continue to monitor asset quality closely. Despite the challenging economic environment, NPLs remain low at 3 percent as of March 2024. Yet, the higher interest rate environment warrants continued close monitoring. To resolve the residual assets of the DIA portfolio of bad assets, we have been making progress with selling receivables from the portfolio as individual packages of receivables.

32. We will continue to implement reforms of state-owned financial institutions and will ensure strong oversight.

  • We will continue to implement the government strategy for Banka Postanska Stedionica (BPS) for the period 2021-25. We will continue to closely monitor risks related to new lending to medium-size companies, SOEs and local governments.

  • The Development Fund and AOFI will continue to implement (i) the supervisory boards' decisions recognizing losses on their credit portfolios, and (ii) the government conclusion to restrict the institutions' exposures to SOEs, enhance risk management frameworks, prevent further deterioration in asset quality, and resolve impaired assets. In addition, in line with the Action Plan as defined in the adopted Concept of Development Financing Policy, both DF and AOFI have started raising awareness among SMEs, introducing external audit, improving performance management, internal audit risk management and business compliance functions.

33. We continue to enhance Serbia’s capital markets and to diversify sources of long-term financing in line with the Capital Market Development Strategy (CMDS). We are currently working on operationalizing the Corporate Bond Issuer Program which aims to educate, promote, and support issuers in their preparation for issuance of corporate bonds. Specifically, we are now hiring professional services providers that will support interested corporates in all phases of the bond issuance process. The first corporate issuances are expected in 2H2024.

F. Structural and Governance Policies

34. We have been working on information systems that cover social protection programs in general, which also cover the needs of vulnerable groups, reducing inequality, and fighting poverty. We are working on integrating the Social Card register with the information system SOZIS that envisages adding the module for social benefits and services at the local level, the module for the payment of rights at the republic level, the modules for reporting by the users as per management levels of social protection and by other beneficiaries entitled to use the data. Also, the Republic and Provincial Institute for Social Protection are foreseen as the beneficiaries of the SOZIS, including the Chamber of Social Protection.

35. We have been developing a comprehensive agenda for green growth to ensure a more sustainable and environmentally friendly economic development. This is also important to prepare for the EU Carbon Border Adjustment Mechanism (CBAM) and to continue to attract FDI to Serbia. We have been guided by the Low-Carbon Development Strategy for 2023-30 with projections until 2050, adopted in 2023. The strategy is harmonized with Serbia’s INECP and the Energy Development Strategy (A10). We have been prioritizing green investments, including in renewable energy and energy efficiency, and making progress on green budgeting. We will consider carbon pricing mechanisms once the overarching goals and principles have been designed.

36. We will continue to support reforms to strengthen the rule of law and fight corruption.

  • The new government is expected to approve the draft amendments to the Law on AntiCorruption Agency that will broaden the definition of persons with top executive functions (PTEFs) to include Ministerial chief of cabinets and advisors to strengthen our asset declaration regime. In addition, these amendments will address legal gaps regarding SOE management and would clearly define them as PTEFs.

  • We have made progress in the fight against corruption, successfully fulfilling 10 of the 13 GRECO recommendations from the 4th evaluation report, while the remaining three recommendations have been partially fulfilled. We will continue to address outstanding GRECO recommendations outlined in the 5th evaluation report.

  • We will continue to strengthen the capacity of the Agency for the Prevention of Corruption and commit to providing it with sufficient budgetary resources to fulfill its mandate.

37. We remain committed to resolving enterprises in the portfolio of the former Privatization Agency in accordance with the Privatization Law.

  • We will not reopen MSK.

  • We remain committed to a plan for Resavica mines that foresees the closure of several unviable mines, while developing a voluntary social program and labor optimization plan. We will ensure sufficient resources in the budget to transparently support Resavica through subsidies and to prevent further accumulation of arrears to EPS.

38. We will continue strengthening the AML/CFT framework.

  • The most recent FATF peer assessment (the MONEYVAL 5th Enhanced Follow-up Report) noted Serbia's progress on FATF recommendation 15 and assessed Serbia to be fully or largely compliant with all 40 FATF recommendations. As a result of its compliance level with the FATF recommendations, Serbia is no longer required to report to MONEYVAL under the 5th evaluation round. This is clear evidence of our dedicated and continuous efforts in this field.

  • The most recent AML/CFT-related legislative amendment took place in October 2023 when the Law on the Prevention of Money Laundering and the Financing of Terrorism (AML/CFT Law) was amended to include the Central Securities Depository and Clearing House on the list of obliged entities.

  • We will continue our regular reporting under the EU agenda. We will ensure the adequate and timely implementation of the requirements of all AML/CFT related EU Directives and Regulations, in line with the FATF Standards and with EU implementation deadlines. In that vein, we reiterate that our system is aligned with the requirements of the Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU.

  • The competent AML/CFT authorities, including the Administration for Prevention of Money Laundering and Law Enforcement Authorities (LEA), will continue with all their regulatory, supervisory, and other activities, as well as continuous strengthening of their capacities through adequate external and internal trainings, especially concerning the emerging AML/CFT trends and risks. The NBS will continue enforcing AML/CFT regulations via on- and off-site inspections of financial institutions, including assessing the impact of non-residents from high-risk foreign countries on the risk level of each individual banks as well as the impact of cross-border threats in financial flows, and for providers of services related to virtual currencies.

  • For 2024, we plan to (1) update the national AML/CFT/WMD Proliferation risk assessments (NRA); (2) update the national AML/CFT strategy and action plan considering the NRA findings; and (3) prepare and finalize the mutual evaluation process under MONEYVAL's 6th evaluation round. We also will enact a new Law on Central Records which will strengthen Serbia's capacities in ensuring adequate, accurate and up-to-date information on beneficial owners in the already existing Central Records of Beneficial Owners. It will be done by several new mechanisms: (i) documents as regards beneficial owner must be uploaded simultaneously with the application; (ii) mandatory annual checks of the recorded data; (iii) public list of entities that did not record beneficial owner; (iv) clearer rules on when beneficial owners of trusts and legal arrangements should be recorded; (v) clearer rules on supervision and sanctions.

  • We will also continue closely monitoring the implementation of targeted financial sanctions by regulated entities to prevent potential spillovers related to the Ukraine conflict.

39. We will continue to strengthen the quality and transparency of national statistics. We remain committed to comprehensive, timely, and automatic data sharing across relevant compiling agencies (including MOF, SORS and NBS) for statistical purposes. NBS and SORS are coordinating on the compilation of financial and non-financial accounts for general government consistent with GFSM 2014, targeting transmission to the IMF and Eurostat from 2026. The 5-yearly benchmark revision of national accounts estimates is scheduled for October 2024, and will feature methodological improvements and new data sources, drawing among others on the 2022 census, the 2023 agriculture census and upgraded government finance statistics. Following the improvements to the national accounts and fiscal statistics we will review subscribing to the IMF's Special Data Dissemination Standard (SDDS).

G. SOE Reforms

40. We are fully committed to changing the operation of SOEs in Serbia, spearheaded by the recent landmark SOE governance law. The new SOE governance law, which is aligned with the OECD Guidelines on Corporate Governance of SOEs, was adopted by the National Assembly in September 2023 and will take effect from September 16, 2024. In April 2024, we adopted an Action Plan for the implementation of the SOE Ownership Strategy for 2024-2025. We have been working with experts provided by EBRD and SECO on drafting the secondary legislation to operationalize the law. We have also been working with IMF technical assistance team to help us with a draft bylaw on costing of public service obligations by end-September 2024 (end-September 2024 SB). In addition, the Coordination Body consisting of members of all relevant stakeholders, has been assessing the compliance of the provisions of this new SOE governance law with the existing special laws. We are committed to strengthening the relevant SOE unit in the Ministry of Economy by providing adequate financing to accelerate hiring of additional staff. We will also explore options with donors to provide training to existing staff.

Program Monitoring

41. Progress in the implementation of the policies under this program will continue to be monitored through quantitative performance criteria (QPCs), indicative targets (ITs), including an inflation consultation clause and natural gas prices consultation clause, continuous performance criteria (CPCs) and structural benchmarks (SBs). These are detailed in Tables 1a, 1b, and 2, with definitions provided in the attached Technical Memorandum of Understanding (TMU). Reviews by the IMF are conducted on a semi-annual basis to assess program implementation and reach understandings on any further reforms needed. The fourth and final review is scheduled to be completed soon after December 2, 2024.

42. The NBS will continue maintaining a strong safeguards framework and internal controls environment. As required by the IMF's safeguards policy, we will continue to engage independent external audit firms to conduct the audit of the NBS in accordance with international standards. We will also provide Fund staff with the necessary NBS's audit reports and authorize representatives of the external audit firm of the central bank to hold discussions related to their reports with Fund staff.

Table 1a.

Serbia: Quantitative Performance Criteria and Indicative Targets Under the SBA 2023-241/

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1 / As defined in the Memorandum of Economic and Financial Polices, and the Technical Memorandum of Understanding. 2/ Cumulative since the beginning of a calendar year. 3/ Refers to the fiscal balance on a cash basis, including the amortization of called guarantees. A surplus is reported with a negative sign. 4/ Calculated consistent with Gross International Reserves at 90 percent of the ARA metric for floors set with CR 23/433, and consistent with 100 percent of the ARA metric for the revised QPC and revised IT (see TMU). 5/ Indicative targets include (i) the items under I. Quantitative Performance Criteria at end-March and end-September, and (ii) the targets under II Indicative Target (IT). ITs are not monitored as part of program conditionality. 6/ Net cumulative change since the start of the year, measured as the change in the stock at the test date and at the start of that year. 7/ Staff level consultation is required upon breach of the band limits at the specific test date. 8/ Defined as the change over 12 months of the end-of-period consumer price index, as measured and published by the Serbian Statistics Office.
Table 1b.

Serbia: Standard Continuous Performance Criteria

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Table 2.

Serbia: Structural Benchmarks Under the SBA

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Attachment II. Technical Memorandum of Understanding

1. This Technical Memorandum of Understanding (TMU) sets out the understandings regarding the definition of indicators used to monitor developments under the program. To that effect, the authorities will provide the necessary data to the European Department of the IMF as soon as they are available. As a general principle, all indicators will be monitored on the basis of the methodologies and classifications of monetary, financial, and fiscal data in place on October 31, 2022, except as noted below. The quantitative performance criteria and structural benchmarks for assessing program performance are shown in Tables 1a, 1b and 2 of the Memorandum of Economic and Financial Policies (MEFP). Definitions and adjustments of these targets are outlined below.

2. For program purposes, the consolidated general government comprises the Serbian Republican government (without indirect budget beneficiaries that are not included in the budgetary execution system), local governments (including the Province of Vojvodina), the Pension Fund, the Health Fund, the Military Health Fund, the National Agency for Employment, the Roads of Serbia Company (JP Putevi Srbije) and any of its subsidiaries, and the company Corridors of Serbia. Reflecting the ongoing work program to expand the coverage of the general government sector in within-year reporting, consolidated general government data for 2023 and beyond include service institutions like dormitories in the education sector now included in the budgetary execution system, and health sector institutions reported by the Health Fund. Any new extra budgetary fund or subsidiary established over the duration of the program would be consolidated into the general government. Consolidated general government data for 2024 will include also science institutes, agencies and high schools.

A. Fiscal Conditionality

3. The general government fiscal deficit is defined as the difference between total general government expenditure (irrespective of the source of financing) and total general government revenue (including grants). General government expenditure includes expenditure financed from foreign and domestic project loans and grants; payments of called guarantees, cost of bank resolution and recapitalization, cost of debt takeover if debt was not previously guaranteed, all budget loans provided to public sector enterprises in the energy sector, and any other budget loans if they have not been repaid by the end of the calendar year; repayments of called guarantees, debt takeovers, budget loans previously recorded "above the line”; and payment of arrears (irrespective of the way they are recorded in the budget law). Privatization receipts are classified as a financial transaction and are recorded "below the line” in the General Government fiscal accounts. Privatization receipts are defined in this context as financial transactions.

4. Current primary expenditure of the Republican budget (without indirect budget beneficiaries that are not included in the budgetary execution system) includes wages, subsidies, goods and services, transfers to local governments and social security funds, social benefits from the budget, other current expenditure, net lending (i.e., budget loans recorded "above the line”), payments of called guarantees, cost of bank resolution and recapitalization, cost of debt takeover if debt was not previously guaranteed; repayments of called guarantees, debt takeovers and budget loans; and payment of arrears (irrespective of the way they are recorded in the budget law). It does not include capital spending and interest payments.

5. For program purposes, any financial support (other than loan guarantees) from the Republican or local government budgets for public enterprises in the energy sector will be recorded “above the line” at the time it is given. Financial support includes, but is not limited to, subsidies, budget loans for liquidity support, capital expenditure or capital grants for financing or co-financing energy sector projects. This is irrespective of the way these transactions are recorded in the budget law. The energy sector covers electricity production and supply, transmission and distribution including associated activities like coal mining; natural gas supply, transportation and storage; district heating; and transport of crude oil and oil products pipelines. Public enterprises in the energy sector include but are not limited to EPS, EMS and EDS and their subsidiaries; Srbijagas and its subsidiaries; and district heating companies; and any public enterprise that may be created by unbundling or be newly founded.

6. Quantitative fiscal targets (MEFP Table 1b) are specified cumulatively from the beginning of each calendar year except where defined otherwise. This includes in particular the quantitative performance criteria and indicative targets on the general government fiscal deficit and the current primary expenditure of the Republican budget, and the reference values for adjustors.

Adjustors

  • The quarterly ceilings on the general government fiscal deficit will be adjusted downward (upward) to the extent that cumulative non-tax revenues of the General Government from dividends, debt recovery receipts, debt issuance premiums, and concession and Public Private Partnership (PPP) receipts recorded above-the-line exceed (fall short of) programmed levels. The IMF Statistics Department will determine the proper statistical treatment of any concession or PPP transaction signed during the IMF program.

Cumulative Programmed Revenues of the General Government from Dividends, Debt Recovery Receipts, and DebtIssuance at a Premium1/

(In billions of dinars)

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1/ Cumulative from the beginning of each calendar year.

  • The quarterly ceilings on the primary current expenditure of the Republican budget will be adjusted upward (downward) to the extent that (i) cumulative earmarked grant receipts exceed (fall short of) the programmed levels, and (ii) cumulative proceeds from small-scale disposal of assets (the sale of buildings, land, and equipment) recorded as non-tax revenues exceed the programmed levels up to a cumulative annual amount of 2 billion dinars in each year. For the purposes of the adjustor, grants are defined as noncompulsory current or capital transfers received by the Government of Serbia, without any expectation of repayment, from either another government or an international organization, including the EU.

Cumulative Receipts from Earmarked Grants and Small-scale Asset Disposal1/

(In billions of dinars)

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1/ Cumulative from the beginning of each calendar year.

7. Domestic arrears. For program purposes, domestic arrears are defined as the belated settlement of a debtor's liability which is due under the obligation (contract) for more than 60 days, or the creditor's refusal to receive a settlement duly offered by the debtor. The program will include an indicative target on the change in total domestic arrears of (i) all consolidated general government entities as defined in A2 above, except local governments; (ii) the Development Fund, and (iii) the Export Credit and Insurance Agency (AOFI). Arrears to be covered include outstanding payments on wages and pensions; social security contributions; obligations to banks and other private companies and suppliers; as well as arrears to other government bodies. This indicative target will be measured as the change in the stock of domestic arrears at the test date relative to the stock at the end of the previous calendar year. Within 45 days of the end of the calendar year, the authorities will report the stock of domestic arrears on December 31, 2022.

8. Debt issued at a premium. For program purposes, debt issued at a premium refers to proceeds accruing to the government that are recorded as revenue when the government issues debt at a premium. It most commonly occurs when a bond with an above-market coupon is reopened ahead of a coupon payment.

9. The continuous structural benchmark on pension payments is in effect as of January 1, 2024. Pensions will only be adjusted through the adjustment mechanism specified in the Pension Insurance Law. The authorities will refrain from increasing pension payments by (i) making any other general adjustment to pensions, and (ii) making ad hoc pension payments such as bonuses.

10. For the purposes of the continuous structural benchmark, pension payments are defined as cash expenditures (including lump-sum payments) paid to pensioners. Pensioners include all persons whose benefits are considered a pension (including old-age, disability or survivors' pensions), as identified by the Republic Fund for Pension and Disability Insurance. Pension payments include regular monthly pension payments and one-off and adjustment payments arising in the course of pension administration paid by the Republic Fund for Pension and Disability Insurance, as well as any ad hoc pension payments or bonuses paid to pensioners (which may be classified as social transfers in the fiscal accounts).

B. Public Debt

11. Public debt is defined as debt and guaranteed debt incurred by the general government.

12. The term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debt will include SDRs used for financing of the Republican budget, and restitution bonds. Debts can take a number of forms, the primary ones being as follows:

  • i. Loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

  • ii. Suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and

  • iii. Leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of these guidelines, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property.

13. Guaranteed public debt is debt guaranteed by the general government, i.e., a contingent liability.

C. Floor on Net International Reserves

14. For purposes of the program, all foreign currency-related assets and liabilities will be valued in euros at program exchange rates as specified below. The program exchange rates are those that prevailed on October 31, 2022. Monetary gold will be valued at the average London fixing market price that prevailed on October 31, 2022.

Cross Exchange Rates and Gold Price for Program Purposes, October 31, 2022

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Sources: International Monetary Fund and NBS.

15. Net international reserves (NIR) of the NBS are defined as the difference between reserve assets and reserve-related, short-term liabilities, measured at the end-of-business day.

16. Reserve assets are readily available claims on nonresidents denominated in convertible foreign currencies (see Balance of Payment Manual, 6.64). They include the NBS holdings of monetary gold,1 foreign exchange balances (foreign currency cash, foreign currency securities, deposits abroad), holdings of SDRs, and the country's reserve position at the Fund. Excluded from reserve assets are any assets that are pledged, collateralized, or otherwise encumbered (e.g., pledged as collateral for foreign loans or through forward contracts, guarantees and letters of credit), claims in foreign exchange arising from derivatives in foreign currencies vis-a-vis domestic currency (such as futures, forwards, swaps, and options), precious metals other than monetary gold, domestically acquired gold without international certificates, assets in nonconvertible currencies, and illiquid assets.

17. Reserve-related liabilities are defined as all foreign exchange denominated liabilities to nonresidents and residents, excluding deposits from the general government, with a maturity of less than one year, including commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options, including any portion of the NBS gold that is collateralized), and the stock of all IMF credit outstanding to the Republic of Serbia. If the NBS conducts swaps as an intermediate between two banks, commitments to sell foreign exchange arising from swaps in foreign currencies vis-a-vis domestic currency are included in foreign exchange denominated liabilities after netting with claims in foreign exchange arising from these swaps.

18. Monitoring. NIR data will be reported to the Fund on a monthly, end-of-month basis, within 14 days after the end of each month.

D. Gas Price Consultation Mechanism

19. Gas prices are defined as the spot prices for natural gas at the Dutch TTF market (closing price "Close*") as reported on https://finance.yahoo.com/quote/TTF%3DF/history/. The 14-day average is the equally weighted average of those prices actually reported during the 14 calendar days ending one day before the reporting day.

20. Exceeding the gas prices means, the 14-day average of natural gas prices exceeds the reference values specified in the table below. The reference gas price applies continuously during the entire quarter. Exceeding the gas price would trigger consultation with staff on the proposed policy response, including any potential additional liquidity support from the budget to Srbijagas and potential tariff increases, as needed. The consultation would take place at least once a month until one month has elapsed after gas prices drop below the reference price.

Reference Values for Natural Gas Price

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1/ Consultation is required if the 14-day average Dutch TTF spot natural gas price (Eur/ MWh) exceeds the upper bound specified. The upper bound price applies continuously during the entire quarter.

E. Ceiling on External Debt Service Arrears

21. Definition. External debt-service arrears are defined as overdue debt service arising in respect of obligations incurred directly or guaranteed by the consolidated general government, the Export Credit and Insurance Agency (AOFI), and the Development Fund, except on debt subject to rescheduling or restructuring. The program requires that no new external arrears be accumulated at any time under the arrangement on public sector or public sector guaranteed debts. The authorities are committed to continuing negotiations with creditors to settle all remaining official external debtservice arrears.

22. Reporting. The accounting of external arrears by creditor (if any), with detailed explanations, will be transmitted on a monthly basis, within four weeks after the end of each month.

F. Inflation Consultation Mechanism

23. Inflation is defined as the change over 12 months of the end-of-period consumer price index (CPI), base index (2006=100), as measured and published by the Serbian Statistics Office (SORS). Where the official press release differs from the index calculation, the index calculation will be used.

24. Breaching the inflation consultation band limits (specified in the MEFP, Table 1b) at the end of a quarter would trigger discussions with IMF staff on the reasons for the deviation and the proposed policy response.

G. Reporting

25. General government revenue data and the Treasury cash position table will be submitted weekly; and the stock of spending arrears as defined in A6 will be reported 45 days after the end of each quarter. General government comprehensive fiscal data (including social security funds) will be submitted within 35 days of the end of each month.

26. The stock of spending arrears (> 60 days past due) as reported in the MOF Invoice central registry system (CRF) and Registry for Settlement of Monetary Obligations (RINO) will be submitted within 14 calendar days after the end of each month.

27. Gross issuance of new guarantees by the Republican budget for project and corporate restructuring loans will be submitted within 35 days of the end of each month.

28. Pension spending will be submitted within 35 days of the end of each month. Details will include total spending, and the breakdown of payments financed by each entity (e.g., the Republic Fund for Pension and Disability Insurance, the Republican budget, etc.)

29. Cumulative below-the-line lending by the Republican budget will be submitted within 35 days of the end of each month.

30. Borrowing by the Development Fund and AOFI will be submitted within 35 days of the end of each month.

31. New short-term external debt (maturities less than one year) contracted or guaranteed by the general government, the Development Fund, and AOFI will be submitted within 35 days of the end of each month.

32. Receivables of the top 20 debtors to Srbijagas and EPS will be submitted in the agreed-upon templates within 30 calendar days after the end of each month, as well as published on the company websites.

33. Detailed balance of payments data on a value basis provided on a monthly basis, 45 days after the end of the month or after publication, which is traditionally available on the NBS website and downloaded by the IMF team.

34. Gross international reserve data will be submitted within one business day after the respective period end as defined in the data reporting table below.

35. Volumes and prices of trade in goods data, on a monthly basis, 8 weeks after the end of the month, which is traditionally available on the SORS website and downloaded by the IMF team

36. Production and consumption data, and cash flow data (actuals and revised projections to the end of the year) for EPS and Srbijagas will be submitted at the end of each quarter, within 20 calendar days, in the agreed templates, until end-September 2023. Starting end-October 2023, this data will be provided at the end of each month, within 20 calendar days. In the interim, until end-September 2023, readily available data for EPS and Srbijagas (profit and loss statements) will be provided at the end of each month, within 20 calendar days.

37. Any support provided from the Republican budget or local government budgets to public enterprises in the energy sector will be reported monthly within 35 calendar days after the end of each month in the template agreed. This will also include any guarantees extended.

38. Data on public debt and publicly guaranteed debt will be submitted monthly within 35 calendar days after the end of each month; except that data on suppliers' credit, leases and obligations arising from the receipt of advance payments will be provided to the extent available on a quarterly basis, and data on guaranteed debt will cover guarantees issued by the Republic of Serbia.

39. Data relevant for staff monitoring of standard continuous performance criteria. Data on exchange rates will be submitted in accordance with the Fund's Multiple Currency Practices Policy that became effective on February 1, 2024, and the agreed monitoring tool. NBS determined exchange rates required include the official exchange rate for RSD/EUR (official mid-rate, and buy rate and sell rate for foreign exchange), and the six cash rates for RSD/EUR, RSD/USD, and RSD/CHF (buy rates and sell rates, respectively). Exchange rates will normally be submitted weekly at the end of the first business day in the following week. Exchange rates will be submitted daily by close of business of the following business day during the five business days prior to a Board meeting, and if a multiple currency practice has been observed, as requested by Fund staff. Other data relevant for monitoring other standard continuous performance criteria will be expeditiously provided if any official actions are taken in these areas (see MEFP Table 1 b).

Data Reporting for Quantitative Targets

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1/ Sufficient to notify IMF that data is available on SORS website. 2/ Sufficient to notify IMF that data is available on NBS website. 3/ If gross reserves decline by more than 5 percent in one day or by more than 10 percent on a cumulative basis for any two-week period, reporting frequency shall be increased to daily, by the end of the subsequent business day, until the NBS and IMF staff mutually agree to return to weekly reporting.
1

See "Annex III. Public Sector Compensation" in IMF Country Report No. 2023/433, pp. 51-52.

2

Serbia: 5th Enhanced Follow-up Report (December 2023), MONEYVAL.

1

See BPM6, 6.78: monetary gold is gold (i) to which the NBS has title, (ii) is held as a reserve asset by the NBS, and (iii) is certified to be at least 995/1000 pure.

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Cover IMF Staff Country Reports
Republic of Serbia: Third Review Under the Stand-By Arrangement and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Republic of Serbia
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2024: Issue 202
Publisher:
International Monetary Fund
ISBN:
9798400278365
ISSN:
1934-7685
Pages:
105
DOI:
https://doi.org/10.5089/9798400278365.002
Figure 1.

Serbia: Regional Import Prices, 2021-241/
Figure 2.

Serbia: Real Sector Developments
Figure 3.

Serbia: Labor Market Developments
Figure 4.

Serbia: Inflation and Monetary Policy
Figure 5.

Serbia: Balance of Payments
Figure 6.

Serbia: Fiscal Developments
Figure 7.

Serbia: Fiscal Financing
Figure 8.

Serbia: Financial and Exchange Rate Developments
Figure 9.

Serbia: Selected Interest Rates and Credit Development
Figure 10.

Serbia: Key Banking Sector Indicators