Yulia Ustyugova, Head of IMF’s Office in Serbia: Resilient Serbian economy

I do want to mention that Serbia’s medium-term outlook, while uncertain, remains favourable, supported by the authorities’ commitment to structural reforms

Although we are 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 both in our country and the world, it is difficult to predict future economic trends. In her interview, Yulia Ustyugova, Head of the IMF’s Office in Serbia, talks about the GDP estimates for Serbia this year, inflation predictions, financial stability and the ongoing agreement between Serbia and the IMF.

Yulia Ustyugova, Head of IMF’s Office in Serbia

The IMF’s assessment of the Serbian economy has been positive throughout the pandemic. When, do you think, Serbia will return to the pre-pandemic GDP growth?

The Serbian economy has indeed demonstrated a high level of resilience helped by agile policy response during the COVID-19 pandemic. Following a mild contraction in 2020, real GDP strongly rebounded by 7.4 percent in 2021 and approached its pre-COVID trend. Not only production but also employment recovered more rapidly than in many other countries. Macroeconomic and financial stability was maintained. Until the war in Ukraine started, Serbia was expected to converge to the pre-pandemic economic trends already in 2022.

The war, however, triggered a costly 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 latest IMF World Economic Outlook, for example, projects GDP growth in advanced European economies and emerging European economies (excluding Belarus, Russia, Turkey, and Ukraine) to decline in 2022 by one and 1.5 percentage points, respectively, compared to the previous forecasts. Several major economies—such as France, Germany, Italy, and the United Kingdom—are projected to barely expand or even contract for two straight quarters this year.

What is your assessment of Serbia’s GDP trends this year?

According to our latest assessment, lower growth in trading partners and higher global commodity prices could curtail Serbia’s real GDP growth to around 3.5 percent in 2022. This is one percentage point below our previous forecasts. Moreover, near-term risks to the outlook are elevated and mostly to the downside. These risks include more prolonged or more severe spillovers from the war in Ukraine. They also stem from growing energy prices and energy supply disruptions, further trade disruptions, and lower global demand. I 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 remained significantly lower. What are your projections for this year?

Indeed, higher global energy and commodity prices fuel inflationary pressures across all 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 so far. Importantly, monetary policy has been tightened since October 2021, in response to the rising inflation.

“As for the exchange rate stability, the National Bank of Serbia has repeatedly emphasized that the exchange rate would be kept stable through this crisis”

Taking all these factors into account, we expect Serbia’s inflation to remain elevated over the next months amid high global inflation, but commence a gradual decline in the second half of 2022, assuming that food price inflation subsides after last year’s drought-induced price hike. We will release the updated inflation projections in late June.

The euro/dinar exchange rate is still stable, as is Serbia’s financial sector. Can the Ukrainian crisis cause a significant fluctuation in the exchange rate and financial stability in Serbia?

Regarding financial stability, as mentioned in the latest IMF Global Financial Stability Report, the war in Ukraine fuelled financial stability risks globally. The National Bank of Serbia acted swiftly and appropriately to manage and mitigate those risks. It timely initiated a resolution procedure in respect of Sberbank Srbija and quickly finalized its acquisition by a domestic banking group. The financial system 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 National 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 level of foreign exchange reserves of the NBS offers an important buffer to financial disturbances that we witness these days.

Continuation of reforms and further growth are just some of the priorities for the next period, according to the IMF mission in Serbia. Apart from this, what should be the other priorities of the new Serbian government?

There are several critical reform areas under the IMF-supported program planned for the period ahead. These include anchoring medium-term fiscal discipline with a new set 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 under the new capital market development strategy, and pursuing the transition to greener growth.

Among other priorities, I would emphasize the urgent need for rigorous reforms in the main energy companies and the sector overall. As you know, the disruptions in domestic electricity production during the 2021-22 winter coincided with rising international gas 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 support 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 roll out without a delay a new energy investment strategy to underpin energy security and the greening of energy generation in Serbia.

Serbia is prominently positioned on the investment destination map. What else can the country do to increase the FDI influx?

In the current context of high uncertainty, the immediate priority is to preserve macro-fiscal and financial stability and mitigate the impact of the ongoing external shocks. This will help ensure a more predictable environment for the existing and new businesses. Here I would like to underscore that maintaining macro-fiscal and financial stability has clearly been a priority for Serbian policymakers, who also formed a task force to help the companies navigate supply chain disruptions.

“I would emphasize the urgent need for rigorous reforms in the main energy companies and the sector overall”

At the same time, it will be important to continue with structural reforms to improve the 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. In addition, focus on digitalization will be instrumental for Serbia’s transition to a knowledge- and innovation-based economy, attractive for the quality-FDIs.

Last year, Serbia concluded a new advisory arrangement with the IMF, which will last until the end of 2023. Could you tell us a bit more about the most important points of this arrangement?

This arrangement is called Policy Coordination Instrument (PCI). It was designed for the countries that do not need the IMF financial resources but want to demonstrate commitment to a coherent reform agenda, communicate this commitment domestically and externally, and benefit from continued policy discussions. Like other IMF arrangements, the PCI involves reform targets and reviews to provide regular feedback on program performance. I am pleased to say that the First Review Under the PCI was already successfully completed in December 2021. The Second Review will be considered by the IMF Executive Board in June 2022, when we also expect to release a new report with a detailed discussion of economic developments and challenges facing Serbia.

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