IMF: Pandemic affects Serbia's economy, change of goals needed for the rest of the PCI program

The Head of the Mission of the International Monetary Fund (IMF), Jan Kees Martijn, announced on July 3 that the coronavirus pandemic had affected Serbian economy as well, which is why the realization of the current Policy Coordination Instruments requires a change of goals by the end of the program in January 2021.

– 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 – Martijn said in a press release.

In a statement following the fourth review of the arrangement, he said that quantitative targets had been reset to reflect the major changes in the fiscal outlook for 2020 and added that “the pandemic has had a significant adverse impact on Serbia’s economic activity.”

– The shock is affecting the economy through lower external demand, weaker foreign investment and remittances, domestic supply constraints, and disruptions in regional and global supply chains. Real GDP is projected to contract by 3% in 2020, compared to an increase by 4.2% in 2019, and is expected to rebound to 6% growth in 2021 – Martijn said.

As he said, given the highly uncertain economic outlook, the IMF Mission recommends careful contingency planning, while ad-hoc pension increases, or one-off payments should be avoided, and increases in public sector wages should be limited.

– To mitigate the economic and social effects of the COVID-19 shock, the authorities deployed a prompt and well-designed policy response. The fiscal package, which includes increased healthcare spending, tax deferrals, wage subsidies, universal cash transfers, and a state guarantee scheme for bank loans to SMEs, is among the largest in emerging Europe – the IMF representative said.

He added that the National Bank of Serbia (NBS) had contributed to the response, including by cutting the key policy rate and injecting liquidity in the banking system, while introducing a three-month moratorium on bank loan repayments and further measures to preserve monetary and financial stability.

– The implementation of the fiscal measures, together with the decline in revenues associated with lower economic activity, will raise the fiscal deficit in 2020 to more than 7% of GDP, compared with 0.5% of GDP in the initial budget. 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 – Martijn said.

At the same time, he says, 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.

– 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. This should ensure that the public sector wage bill as a share of GDP returns to more sustainable levels, after increasing in the last two years. Ad-hoc pension increases, or one-off payments should be avoided – he pointed out.

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, he said.

He also pointed out that a thorough assessment of electricity tariffs was warranted to ensure full-cost recovery.

Međunarodni monetarni fond-MMF Beograd

Narodna banka Srbije Beograd

IMF

Jan Kees Martijn

pandemic

coronavirus

Serbian economy

Policy Coordination Instrument

IMF arrangement

GDP

public debt of Serbia

review of PCI arrangement

PCI

key policy rate