Serbian authorities have expressed interest in a new arrangement with the International Monetary Fund (IMF). They also said that they do not need IMF financing, so the new program could be the successor to the current policy coordination instrument (PCI). The new arrangement could help Serbia implement policies to strengthen macroeconomic stability and the resilience of the financial system, while signaling a commitment to reform. In addition to the agreement on macroeconomic and financial policies, the new arrangement will require an ambitious program of structural reforms that could be approved by the IMF, Sebastian Sosa, the IMF’s permanent representative in Serbia, told Politika.
The current program of Serbia and the IMF is coming to an end. How successfully did Serbia implement it, given the worsening economic situation due to the pandemic?
The policy coordination instrument was well on its way before Covid-19 hit the Serbian economy.
The sharp deterioration in external and domestic economic conditions caused by the pandemic required adjustment of targets for the rest of the program, which expires in January 2021. Thus, the focus of the program shifted to supporting the economy in crisis while preserving macroeconomic and financial stability, risk management and protection of vulnerable groups. To mitigate the economic and social impact of the pandemic, Serbian authorities have implemented a rapid and well-designed policy response. The fiscal package, including increased health care costs, tax deferrals, wage subsidies, universal money transfers and a state guarantee scheme for bank loans to small and medium-sized enterprises, was among the largest in Europe. The National Bank of Serbia (NBS) contributed to the response by reducing key interest rates and injecting liquidity into the banking system, while introducing a moratorium on bank loan repayments and further measures to preserve financial stability. This strong response played an important role in supporting the economy during the crisis. The Covid-19 pandemic has also impacted progress on PCI-supported structural reforms. Implementation of reforms in some important areas is significantly delayed.
What will be the fall in GDP this year, and what are the projections for next year?
After a sharp decline in the second quarter of 2020 due to the shock caused by Covid-19, economic activity increased – in part due to a large fiscal package supported by monetary and financial measures implemented in response to the crisis. Our latest projections predict a real GDP decline of 1.5 percent in 2020 and a rebound in 2021, with a projected growth of five percent. We have changed the projections throughout the year, and the risks up and down remain high due to the unpredictable course of the epidemic and are related to the disturbances in Serbia and its trading partners.
The topic of recent online conversations was the budget for 2021 and the rebalance for this year. What has been agreed in this regard?
The total fiscal deficit in 2020 will reach almost nine percent of GDP, compared to 0.5 percent of GDP in the initial budget, as a result of the cost of fiscal measures applied in response to the crisis and falling revenues due to lower economic activity. Public debt, which had been steadily declining before the pandemic, is expected to increase to nearly 60 percent of GDP in 2020. The IMF mission agreed with the authorities on the key parameters of the budget for 2021. This budget must strike a balance between economic recovery and fiscal responsibility. Given the expected economic recovery, reducing the overall fiscal deficit to three percent of GDP would be appropriate and would ensure that public debt as a percentage of GDP continues on a clear path of decline, following a temporary increase in 2020.
The International Monetary Fund has reiterated several times this year that the growth of salaries and pensions in 2021 should be limited. Did you stick to that position during the previous conversations? I remind you that our officials are announcing an increase in both.
Within the budget plan, which envisages a deficit of no more than three percent of GDP, we agreed on the need to strengthen public investment, including green investment, which will support recovery and stimulate potential growth. To create room for increased investment and given the increased fiscal risks, including troubled state-owned enterprises, we said that public sector wage increases should be limited in 2021. This will ensure that the wage bill in the public sector as a share of GDP decreases to a more sustainable level, after an increase in the last three years. Pensions should increase in line with the recently introduced indexation rule, based on the so-called Swiss formula, while avoiding additional ad hoc increases or payments. Finally, we recommended that fiscal risks arising from state-owned enterprises should be closely monitored and that any support to these companies should be provided transparently through the budget.
Are there options in next year’s budget for new aid to the economy?
As mentioned earlier, we believe that the budget for 2021 should strike a balance between supporting the ongoing recovery and returning to a more sustainable fiscal deficit. The budget must prioritize public investment to support the recovery. On the monetary front, with inflation in the lower half of the target, we have recommended continuous adjustment, as well as support for liquidity to banks and financial markets as needed. It should be noted that Serbia’s GDP is projected to fall by 1.5 percent in 2020, less than in most European countries, and according to the baseline scenario, we predict a relatively strong recovery in 2021. However, if the pandemic continues or its impact is stronger than expected, additional support measures may be needed. In that case, any further incentive should be directed to the companies and households that need it the most.
How do you assess the projected level of investment in the budget for 2021?
We expect public investment to increase to more than 5.5 percent of GDP in 2021. This increase, largely in infrastructure projects, will help create jobs, support recovery and encourage Serbia’s potential growth. Of course, ensuring good quality investment projects is still necessary. This requires further efforts to improve the framework for public investment management in Serbia, ensuring proper prioritization, evaluation, implementation and monitoring of capital spending projects. The IMF’s latest fiscal monitor, released in October 2020, argues that public investment is indeed a powerful tool for limiting the economic consequences of a pandemic and laying the groundwork for a more resilient economy by investing in labor-rich, highly productive and green activities.
How satisfied are you with the implemented reforms in public companies, tax administration and other areas that you monitor?
Progress in implementing structural reforms has been mixed. Progress has been made in modernizing the tax administration, strengthening the public investment framework and monitoring and managing fiscal risks, but efforts are still needed. We welcome the privatization of Komercijalna Banka, which is expected to be completed by the end of 2020. At the same time, there have been delays in implementing reforms in certain areas, especially during the pandemic. For example, reforms to strengthen the governance of state-owned enterprises and to develop capital markets have faced significant delays, while public sector employment and wage reforms have also progressed very slowly in the public sector.
Due to the deteriorating economic situation, many countries, including Serbia, are taking on additional debt and increasing their public debt. How risky is that for us?
Given the adverse economic impact of the pandemic, the IMF has advised countries around the world to apply strong fiscal and monetary incentives. Thanks to fiscal discipline in recent years, Serbia has had ample room to respond to the pandemic crisis with a large package of fiscal measures. By implementing these measures, the fiscal deficit in 2020 will rise to almost nine percent of GDP, while public debt will also increase significantly. However, public debt is expected to remain below 60 percent of GDP. Given the projected economic recovery in 2021 and the temporary nature of fiscal measures, the fiscal deficit should be reduced to about three percent of GDP next year. This implies that public debt as a percentage of GDP should continue with a clear downward trend in 2021, Politika reports.
