"These forecasts incorporate recent data showing a faster recovery than we anticipated earlier, and update the forecasts released with the IMF World Economic Outlook on October 13," the head of the IMF Serbia team Jan Kees Martijn said in a statement on Friday, after the IMF staff-level agreement on policies needed to complete the fifth and final review under the Policy Coordination Instrument (PCI) for the country.
On October 13, the IMF said it expects Serbia's economic output to fall by 2.5% this year, revising its forecast for a 3.0% contraction made in April. The IMF expects Serbia's GDP to grow 5.5% in 2021, the Fund said in its latest World Economic Outlook (WEO) report, downgrading its April forecast for economic expansion of 7.5%.
"After some delays due to the pandemic, the implementation of structural reforms needs to be accelerated to secure strong and stable growth in the medium term. Ongoing efforts are needed to strengthen the tax administration, public investment management, and the monitoring and management of fiscal risks," Martijn said.
Programme implementation has remained broadly on track and economic activity has rebounded following a sharp contraction in the second quarter of 2020 caused by the COVID-19 pandemic, supported by the monetary and financial measures and large fiscal package deployed in response to the crisis, the head of the IMF Serbia team noted.
Reforms of public sector wage and employment frameworks, which have faced substantial delays, should be completed, while enhancing the corporate governance of public enterprises, including state-run power utility EPS, and developing Serbia’s capital market remain vital, Martijn added.
"Progress towards completing the privatisation of Komercijalna Banka is welcome, and we encourage further efforts to privatise Petrohemija. Medium-term priorities to create conditions for faster private sector growth and convergence to EU income levels also include strengthening the rule of law and improving the court system."
The mission agreed with the authorities on the key parameters of the 2021 budget, which has to strike a balance between sustaining the economic recovery and maintaining fiscal responsibility.
"In light of the ongoing economic rebound, a reduction in the fiscal deficit to 3% of GDP would be appropriate for the budget that is currently in preparation, ensuring that public debt in percent of GDP resumes a clear downward path. Within this budget envelope, scaling up public investment, including green investment, will not only support the recovery but also boost potential growth," Martijn said.
To make room for a fiscal deficit reduction it is important that the public sector wage bill as a share of GDP declines to more sustainable levels, after rising in the last three years. Hence, increases in public sector wages should be limited in 2021. "Pension increases should follow the agreed Swiss formula, and additional ad-hoc increases or payments should be avoided. Fiscal risks from SOEs need to be monitored closely, and any support to these companies should be provided transparently through the budget."
Serbia held virtual talks with the IMF mission to discuss fiscal, monetary and overall macroeconomic developments during October 5 - 16. Successful completion of the review is subject to meeting the remaining programme conditions, and approval by the IMF management and executive board. The board is tentatively scheduled to consider the review in early January 2021.
