November 1 (SeeNews) - The International Monetary Fund (IMF) said on Tuesday it had reached a staff-level agreement with Serbia on policies needed to complete the sixth review under the precautionary stand-by arrangement and unlock an additional 68.53 million euro ($75.5 million).
The agreement is subject to completion of policy actions related to key structural, fiscal, and financial measures, and approval by the IMF's management and executive board. The board is tentatively scheduled to convene mid-December, the IMF said in a statement.
The IMF noted it held constructive discussions with Serbia's government during a visit of its mission to Belgrade between October 20 - November 1.
The completion of the review will bring the total funds available to Serbia, so far, to 832.14 million euro. The Serbian authorities have indicated that they do not intend to draw on the resources available under the arrangement, the global lender said.
During the two week review, the IMF found that strong performance under Serbia’s economic programme is continuing.
"Growth is strengthening, and labor market indicators show noticeable improvement", the IMF said, adding it now expects real GDP growth of 2.7% in 2016 and 3% in 2017, up from 2.5% and 2.8%, respectively, predicted in September.
The mission found that inflation remains subdued even as private sector wage growth accelerates. It noted that it supports the intention of Serbia's central bank to lower the inflation target to 3% +/-1.5 pp.
"This change reflects the significant improvement in macroeconomic fundamentals, and reinforces confidence. It should also help further reduce interest rates and encourage greater use of the dinar in the economy. The current cautiously accommodative monetary policy stance remains consistent with the new target, with inflation expected to gradually increase through 2017".
The IMF mission said that robust fiscal performance continues in Serbia, driven by stronger-than-expected revenues. The general government deficit is now projected at 2.1% of GDP in 2016, it said.
The IMF mission also said that public debt is falling a year ahead of schedule, and is projected to end the year below 74% of GDP. In view of this over-performance, the mission agreed with the authorities’ plan to use part of the fiscal space in 2016 to cover some one-off expenditures, including a bonus for pensioners and the resolution of historical arrears of state-owned enterprises.
The mission and the Serbian authorities also agreed on the key parameters of the 2017 budget. "The priority is to continue with a gradual fiscal consolidation and to ensure public debt is put on a firm downward trend", the IMF said, adding that it has agreed with the authorities on a targeted public wage and pensions increase.
"The fiscal deficit is expected to decline to 1.7% of GDP in 2017, while overall pensions and wage bills continue to decline as shares of GDP, converging to more sustainable levels over the medium-term", the IMF mission judged.
It, however, warned that in order to ensure a durable fiscal improvement and achieve strong, inclusive growth over the medium term, the authorities need to decisively tackle structural challenges. "The public sector reforms must be accelerated, to deliver better public services while contributing to the fiscal consolidation process. In particular, reforms of the education system are well overdue", the IMF said.
The mission concluded that decisive actions are also needed to end the drain on public resources by large utility companies and other state-owned enterprises. "In this context, clear plans for the resolution or restructuring of RTB Bor, Resavica, Petrohemija, Azotara and MSK will be required under the program. Importantly, the practice of financing weak public entities and companies through arrears to Srbijagas and EPS needs to be discontinued", it cautioned.
In the financial sector, the IMF judged that the NPL resolution strategy is yielding results, but said that more decisive action is needed to reduce bad loans, including in state-owned banks.
The IMF successfully completed the combined fourth and fifth reviews of Serbia’s economic performance under the SBA in early September.
In February 2015, the IMF approved a 1.2 billion euro stand-by arrangement that aims to help Serbia restore public finances’ health, increase the stability and resilience of the financial sector and implement comprehensive structural reforms.
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