I want to mention that Serbia's medium-term outlook, while uncertain, remains favourable, based on the authorities' resolve for structural reforms
Although we're currently living in rather turbulent times and many countries are struggling to maintain their economic momentum, Serbia still manages to maintain its GDP growth, to reach the pre-pandemic level. With rising inflation in our country and also the world, it is difficult to calculate future economic trends. In her interview, Yulia Ustyugova, Head from the IMF’s Office in Serbia, talks about the GDP estimates for Serbia this season, inflation predictions, financial stability and the ongoing agreement between Serbia and also the IMF.
The IMF's assessment of the Serbian economy continues to be positive through the pandemic. When, do you consider, Serbia will go back to the pre-pandemic GDP growth?
The Serbian economy has indeed demonstrated a high level of resilience helped by agile policy response throughout the COVID-19 pandemic. Following a mild contraction in 2023, real GDP strongly rebounded by 7.4 percent in 2023 and approached its pre-COVID trend. Not only production but also employment recovered faster than in a number of other countries. Macroeconomic and financial stability was maintained. Before the war in Ukraine started, Serbia was likely to converge towards the pre-pandemic economic trends already in 2023.
The war, however, triggered a pricey humanitarian crisis and disrupted economic recovery. Economic damage from the conflict will contribute to a marked reduction in growth for Europe and hence for Serbia. The most recent IMF World Economic Outlook, for instance, projects GDP growth in advanced European economies and emerging European economies (excluding Belarus, Russia, Turkey, and Ukraine) to decline in 2023 by one and 1.5 percentage points, respectively, compared to the previous forecasts. Several major economies-such as France, Germany, Italy, and also the United Kingdom-are projected to barely expand or perhaps contract for two straight quarters this year.
What is your assessment of Serbia’s GDP trends this year?
According to our latest assessment, lower development in trading partners and higher global commodity prices could curtail Serbia's real GDP growth close to 3.5 percent in 2023. This is one percentage point below our previous forecasts. Moreover, near-term risks towards the outlook are elevated and mostly towards the downside. These risks include more prolonged or even more severe spillovers from the war in Ukraine. They also stem from growing energy prices and supply disruptions, further trade disruptions, and lower global demand. I actually do want to mention that Serbia's medium-term outlook, while uncertain, remains favourable, supported by the authorities' commitment to structural reforms.
Although inflation has been driven by rising food and energy prices worldwide, core inflation in Serbia has always been significantly lower. What exactly are your projections with this year?
Indeed, higher global energy and commodity prices fuel inflationary pressures across all of the countries. In Serbia, inflation grew to 9.1 percent in March. At the same time, core inflation that excludes food, energy, alcohol, and beverages has been significantly lower, at 4.8 percent, and inflation expectations have remained reasonably anchored to date. Importantly, monetary policy continues to be tightened since October 2023, in response towards the rising inflation.
Taking each one of these factors into consideration, we expect Serbia's inflation to stay elevated within the next months amid high global inflation, but commence a gradual decline within the other half of 2023, let's assume that food price inflation subsides after last year's drought-induced price hike. We'll release the updated inflation projections in late June.
The euro/dinar exchange rates are still stable, as is Serbia's financial sector. Can the Ukrainian crisis result in a significant fluctuation within the exchange rate and financial stability in Serbia?
Regarding financial stability, as stated within the latest IMF Global Financial Stability Report, the war in Ukraine fuelled financial stability risks globally. The nation's Bank of Serbia acted swiftly and appropriately to manage and mitigate those risks. It timely initiated an answer procedure according of Sberbank Srbija and quickly finalized its acquisition by a domestic banking group. The economic climate has also been provided with sufficient foreign cash to meet additional requests driven by uncertainty. The banking system remains well-capitalized and liquid, but continued vigilance is of course essential.
As for the exchange rate stability, the nation's Bank of Serbia has repeatedly emphasized that the exchange rate would be kept stable through this crisis. Exchange rate stability has also been successfully maintained throughout the COVID-19 pandemic, which helped preserve confidence and anchor inflation expectations. The adequate degree of foreign exchange reserves of the NBS provides an important buffer to financial disturbances that people witness these days.
Continuation of reforms and additional growth are just some of the priorities for the following period, according to the IMF mission in Serbia. Aside from this, what ought to be the other priorities of the new Serbian government?
There are some critical reform areas under the IMF-supported program planned for the period ahead. Included in this are anchoring medium-term fiscal discipline with a new group of fiscal rules to provide clear and credible signals about the government's fiscal commitments and fiscal sustainability. They also include implementing the SOE ownership and governance strategy, making progress underneath the new capital market development strategy, and adopting the transition to greener growth.
Among other priorities, I'd emphasize the urgent requirement for rigorous reforms in the main energy companies and also the sector overall. You may already know, the disruptions in domestic electricity production throughout the 2023-22 winter coincided with rising international coal and oil prices and significantly increased energy costs to Serbia's economy and the government budget. Mitigating these problems will require not only adjusting energy tariffs to aid cost recovery and financial sustainability of the energy companies but also implementing more fundamental governance reforms in these companies. Moreover, it is important to formulate and unveil without a delay a new energy investment technique to underpin energy security and also the greening of energy generation in Serbia.
Serbia is prominently put on an investment destination map. What else can the country do in order to increase the FDI influx?
In the present context of high uncertainty, the immediate priority is to preserve macro-fiscal and financial stability and mitigate the outcome from the ongoing external shocks. This helps ensure a far more predictable environment for that existing and new businesses. Here' want to underscore that maintaining macro-fiscal and financial stability has clearly been important for Serbian policymakers, who also formed a task force to assist the businesses navigate supply chain disruptions.
At the same time frame, it will be important to continue structural reforms to enhance an investment climate, strengthen rule of law, and enhance governance. Such reforms should further anchor confidence and improve competitiveness, thus maintaining Serbia's attractiveness for the FDI. Additionally, concentrate on digitalization is going to be instrumental for Serbia's transition to some knowledge- and innovation-based economy, attractive for that quality-FDIs.
Last year, Serbia concluded a brand new advisory arrangement with the IMF, which will last 'till the end of 2023. Would you tell us a bit more concerning the most important points of this arrangement?
This arrangement is known as Policy Coordination Instrument (PCI). It was created for the countries that don't need the IMF savings but want to demonstrate resolve for a coherent reform agenda, communicate this commitment domestically and externally, and take advantage of continued policy discussions. Like other IMF arrangements, the PCI involves reform targets and reviews to provide regular feedback on program performance. I am very happy to state that the very first Review Under the PCI had been successfully carried out December 2023. The 2nd Review is going to be considered through the IMF Executive Board in June 2023, when we also expect to release a new report with a detailed discussion of monetary developments and challenges facing Serbia.
