The International Monetary Fund (IMF) has agreed to allow Serbia a budget deficit increase from three to 4.5 per cent of GDP in 2009, IMF Mission to Serbia Chief Albert Jaeger said in Belgrade on September 1 2009.
 
An IMF mission led by Jaeger, visited Belgrade from August 24 to September 1 to work on the second review of the IMF-supported Stand-By Arrangement with Serbia.
 
Jaeger told a news conference: "There are encouraging signs that the Serbian economy’s decline seems to be moderating. While developments in the first half of the year have been somewhat worse than previously anticipated, financial tensions have eased.
 
"We expect output in Serbia to stabilise in the second half of the year, consistent with the output decline of four per cent for 2009 as a whole. Next year, a modest recovery of 1.5 per cent is projected, and risks to the growth outlook are now more balanced. Inflation has been within the targeted band and the large current account deficit has been falling rapidly.
 
"The current stand-by arrangement has generally performed well. Most performance criteria and other agreed measures have been implemented. The external reserve position has strengthened and the banks are honouring their commitments to roll over external exposures," Jaeger said, according to an IMF statement.
 
Results of the stress tests for Serbia’s 12 largest banks indicate that the banking system is adequately capitalised and liquid. However, the performance criterion on the fiscal deficit was exceeded at end-June, reflecting output weakness, but also some implementation problems.
 
"Regarding the 2009 budget, there was agreement to raise the deficit target from three to 4.5 per cent of GDP, given the need to avoid excessive tightening in a period of output weakness," he said.
 
"Attaining this target would, however, require tight spending execution in the rest of the year."
 
Jaeger said that broad agreement was also reached on initial steps in medium-term structural sectoral reforms in the areas of public administration, large state enterprises and local utilities, pensions, health, and education.
 
The authorities Serbian had prepared "useful early proposals", but it was recognised that their effects on public spending would be gradual and initially limited, while requiring perseverance in implementation, the IMF said.
 
"The mission saw a need to address a sizable deficit of 5.5 per cent of GDP that could be inconsistent with sustainable public finances. This projection already assumes a continued freeze in public wages and pensions, as well as a public hiring freeze.
 
"The authorities have considered tax increases as unacceptable, and instead proposed to undertake a more ambitious and comprehensive strategy of multi-year spending reforms."
 
Jaeger said that the mission was "open to this idea", not least in view of the considerable claims Serbia's large public sector makes on the economy.
 
"However, both sides agreed that a determined implementation of the spending-based reforms would be crucial to avoid tax increases, and it was clear that more time was needed to elaborate such a strategy. Thus, it was agreed to aim to complete the second review during the next mission at the end of October, while co-operating on a continued implementation of the program’s measures," he said.
 
"As regards other areas, the mission recommended to continue focusing monetary policy on inflation. While there may be scope for some monetary easing given the economic slowdown, it was agreed that it should proceed with caution given the still-high inflation. The mission also made several recommendations on improving the design of current credit support programs and the framework for claims enforcement," Jaeger said.