JAMES ROAF, Head of the IMF mission for Serbia: Impressive Turnaround

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Serbia has been very successful in stabilizing the economic situation over the last three years. Whether those achievements will remain sustainable depends on whether the Serbian people and their leaders are prepared to make them such

Prior to the three-year precautionary Stand-By Arrangement (SBA) signed in 2015, Serbia has accumulated internal and external economic imbalances. The government appointed in April 2014 has recognized the challenges associated with these imbalances and made a strong commitment to address them. At the time of beginning of the Agreement, the consequences of global financial crisis lost their grip, but downside risks to Serbia’s exports and external funding sources, were visible. To insure against such risks and better anchor our policy framework, the government requested IMF support for the new economic program through a precautionary SBA for a period of 36 months in the amount of SDR 935.4 million (200 percent of quota). The implementation of the program was monitored through prior actions, quantitative performance criteria, indicative targets, structural benchmarks, and an inflation consultation clause with regular reviews of the arrangement by the Fund. An International Monetary Fund (IMF) mission, led by James Roaf, visited Belgrade during October 26 – November 7, 2017, to hold discussions on the eighth and final review under Serbia’s precautionary Stand-By Arrangement (SBA). Following the end of the mission the IMF stated that the mission agreed with the authorities on the key parameters of the 2018 budget and underlined that the priority is to preserve hard-won fiscal achievements, while supporting growth-enhancing initiatives, such as increasing public investment and reducing the tax burden on low-income workers. Along with the agreed wage and pension increases, the 2018 fiscal deficit is projected at 0.7 percent of GDP – a level consistent with fiscal sustainability and further public debt reduction. At the end of the mission we conducted an exclusive interview with Mr. Roaf in which we discussed in detail the achievements of the arrangement, the remaining challenges and prerequisites if Serbia wants to make the achieved results sustainable on the midterm level. We also touched upon the history of Serbia’s arrangement with the IMF.

Would you please evaluate the outcome of the three-year-arrangement with Serbia?

Serbia has been very successful in stabilizing the economic situation over the last three years. Prior to the start of the program, the public finances were in a dire situation, facing the largest fiscal deficit in Europe and rapidly rising public debt, while growth had been stagnant. Already by 2017 we are expecting the budget to be roughly in balance, with debt falling fast. Improved confidence is reflected in much lower interest rates, and strong investment from both domestic and foreign sources. Economic activity and employment are both rising, and unemployment has fallen sharply. Financial sector reforms have been pursued vigorously, to put banks on a sound footing to support growth. And while there is still very much to do, important progress has been made in other areas of structural reform

covered by the program, such as state-owned enterprise restructuring, public administration reform and strengthening the business climate. Altogether, it has been an impressive turnaround.

What is the importance of this arrangement in retrospective, i.e. in terms of the history of arrangements that Serbia previously had with the IMF?

  • When the program started, there was a legacy of unfinished reforms and failed attempts to address the fundamental problems that have dogged the Serbian economy since the transition from socialism. In the past, some programs were abandoned part way through. Others were successfully completed, but then these underlying problems in the Serbian economy caused imbalances to reemerge. The current program tries to learn from this experience by tackling these structural problems in the economy at the same time as addressing the fiscal deficit. But this doesn’t mean that the job is over. To the contrary – while stabilization offers an opportunity, it has to be protected, while further reforms are needed to reach higher sustainable growth of the economy. Only that will ensure that the standard of living of people in Serbia converges to that of the Western European countries.

How sustainable are the accomplished results midterm?

  • The accomplishments are as sustainable as Serbian people and their leaders are prepared to make them. Considering how difficult the necessary fiscal adjustment was, I would hope that nobody in Serbia would want to allow for the reemergence of imbalances, or to allow fiscal costs to reemerge in state enterprises. But nothing is granted forever. Good policies require good policymaking and building understanding and support around the necessary reforms.

In which areas does the IMF seek to work with the Serbia’s government in the future?

  • Serbia is a member of the IMF and we will work closely with the authorities, in whichever form they will find useful. We will certainly be conducting regular surveillance and making recommendations about the policies needed to support growth and jobs creation. The authorities are also considering options for continuing with more intense cooperation in another Fund-supported program, and we are very ready to work with them on this.

What are the most important tasks for Serbia in order for the country to achieve a more robust growth?

Indeed, Serbia’s priority is strong and sustainable growth, which has to be led by the private sector. A key precondition is to maintain the macroeconomic stability that has been achieved –which means an environment of low inflation, low interest rates and confidence in the currency that allows businesses to plan and invest for the future. Beyond this Serbia needs to build the institutions of a market economy. For example, public administration and services that respond to the needs of citizens and businesses; infrastructure that supports businesses and exports; strong property rights and predictability in the judicial system; fair competition and a much smaller informal sector; social protection that helps the poor participate in the economy; and education and training that provides the skills needed for a modern economy. This is a broad, long-term agenda and in some of these areas we are still near the start of the road. But the faster these reforms can go, the sooner Serbia will reach its destination.

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