The International Monetary Fund (IMF) and the Serbian government reached an agreement on the first review under the precautionary arrangement which envisages a deficit target of 4.25 percent of GDP in 2012 , the government released in a statement on Wednesday.

State Secretary at the Ministry of Finance Dusan Nikezic said at a press conference that the deficit target is below the legal minimum, which is the first significant austerity measure.

Nikezic said that GDP should go up by 2 percent in 2012, whilst the economic expansion will be lower - 1.5 percent, due to a decline in economic activities in the euro zone.

He pointed out that the Serbian government and the National Bank of Serbia (NBS) pursue a responsible economic policy which will enable the maintenance of macroeconomic stability.

The IMF representative who headed the mission in the talks, Mark Allen, expressed satisfaction with the agreement and said he expects that the Serbian government will realize the envisaged budget deficit.

Allen said that the public debt should remain below 45 percent of GDP, and added that the government will take steps to reduce the debt.

According to him, inflation in Serbia is slowing and the financial system is well-capitalized.

He voiced belief that NBS will manage to ensure stability of the financial system.

The talks between the Serbian government and the IMF mission, which are part of the first quarterly review of the results achieved in the implementation of the precautionary agreement, started in Belgrade on November 3.

The official talks began on Wednesday by a plenary meeting at the National Bank of Serbia, and on the same day the IMF mission met with Prime Minister Mirko Cvetkovic.

The arrangement approved on September 29, in the amount of 935.4 million SDRs (special drawing rights) equivalent to approximately EUR 1.1 billion, was signed out of precaution i.e. with no intention of using the funds except in case of balance-of-payment difficulties.