July 6 (SeeNews) - The International Monetary Fund (IMF) said it has reached staff-level agreement on adjusting the objectives of the 30-month Policy Coordination Instrument (PCI) with Serbia and policies needed to complete the fourth review under the programme.
The sharp deterioration in the external and domestic economic environment caused by the COVID-19 outbreak requires an adjustment of the PCI objectives for its remainder of the programme, which is set to conclude in January 2021, the IMF said on Friday in a concluding statement of a mission led by the head of the IMF's Serbia team Jan Kees Martijn that held virtual meetings with the Serbian authorities during June 24--July 3.
"In this context, policies should continue to focus on supporting the economy through the crisis while preserving macroeconomic and financial stability, managing risks adequately, and protecting vulnerable groups. Quantitative targets have been reset to reflect the major changes in the fiscal outlook for 2020," the IMF said.
The implementation of fiscal measures by the Serbian government, together with the decline in revenues associated with lower economic activity, will raise the fiscal deficit in 2020 to more than 7% of the gross domestic product (GDP), compared with 0.5% of GDP in the initial budget, the Fund said.
"Given the projected economic rebound and the temporary nature of the fiscal measures, it should be possible to reduce the fiscal deficit to about 2% of GDP next year. At the same time, there is a need for scaling up public investment to support the economic recovery and boost potential growth, while the economic shock is amplifying fiscal risks stemming from troubled SOEs and state-guaranteed loans," the IMF noted.
To make room for higher public investment, and in light of budget risks, increases in public sector wages and pensions should be limited in 2021 to ensure that the public sector wage bill as a share of GDP returns to more sustainable levels, after increasing in the last two years. Public debt, which was declining steadily prior to the pandemic, is now expected to increase in 2020 while staying below 60% of GDP, but should resume a clear downward trajectory in 2021.
The agreement on the fourth review under the PCI is subject to approval by the IMF management and executive board. Consideration by the board is tentatively scheduled for the second half of August.