An International Monetary Fund (IMF) mission, led by Albert Jaeger, visited Serbia during May 12-26, to conduct discussions on the fourth review of Serbia’s economic program supported by a Stand-By Arrangement (SBA) with the IMF. At the conclusion of the mission, Mr. Jaeger issued the following statement in Belgrade:

“The IMF staff mission and the Serbian authorities have reached agreement, subject to approval by the IMF Management and Executive Board, on the completion of the fourth review of the SBA. We expect the request to be considered by the IMF’s Board in late June. Completion will allow Serbia to draw SDR319.6 million (about €380 million) to support its external reserve position.

“The program is performing satisfactorily: all key quantitative targets for end-March have been met, with the exception of the target on the fiscal deficit, which was exceeded by a small margin owing to shortfalls in revenue. Progress is being made on the structural benchmarks, with submission of the new pension law to Parliament a prior action for completing the fourth review. The drafting of fiscal responsibility legislation has advanced, but submission of the draft to Parliament had to be postponed to September. Also as a prior action for completing this review, the government is committed to adopt a decision that will facilitate the delayed implementation of employment cuts in public administration.

“Serbia’s recovery has been more hesitant than expected. Private demand remains weak. But exports are picking up and the trade balance continues to strengthen. We expect real GDP to grow by 1½ percent in 2010 and 3 percent in 2011, though risks are tilted to the downside, reflecting potential fallout from the recent regional developments. We expect the external current account deficit to remain contained.

“The mission’s discussions focused on fiscal prospects for 2010 and 2011. It was agreed to raise the 2010 fiscal deficit target to 4¾ percent of GDP, accommodating the revenue shortfall due to the weaker-than-expected economy. Both sides agreed that there is no scope for general increases in public wages and pensions this year. To soften the adverse consequences of the crisis on persons with lower incomes, the authorities have mobilized RSD 6½ billion to provide one-off payments to public wage earners, pensioners, poor municipalities, as well as increase targeted social assistance. For 2011, a fiscal deficit target of 4 percent of GDP has been agreed. As a step toward a more disciplined and rules-based fiscal policy, semi-annual indexation of public wages and pensions will be introduced in April and October 2011 and April 2012, based on CPI inflation during the previous 6 months. In addition, in April 2011 and April 2012 these indexation payments would be increased by ½ of real GDP growth rate achieved in the previous year.

“In a welcome development, inflation has come down markedly, creating an opportunity to durably stabilize price growth in the low single-digit range. Foreign-owned banks have generally maintained, or even increased, their exposure to Serbia. While the National Bank of Serbia (NBS) has, at times, intervened in the foreign exchange market to limit volatility, the international reserve position remains healthy. The ongoing rebalancing of the economy from domestic demand to export-driven growth is expected to underpin Serbia’s shift to a more sustainable growth model.”