Friday, August 7
Daehaeng Kim, Resident Representative, Serbia, International Monetary Fund
On August 7, 2015, as part of the IMF course on Fiscal Analysis and Forecasting, Mr. Daehaeng Kim, IMF Resident Representative in Serbia, delivered a guest lecture at the JVI on “Fiscal Reforms in Serbia: Developments and Challenges.”
Public finances in Serbia had been deteriorating since about 2008/09. Mr. Kim explained that at their core, fiscal imbalances arose from: (1) stagnant growth and a weak labor market; (2) insufficient revenue despite tax rate hikes; (3) poor control of the public wage bill; (4) high pension spending compared to peer countries; and (5) expanding public aid to ailing state-owned enterprises (SOEs), usually in the form of direct subsidies and guarantees for borrowing that often were called.
The Serbian economy has also had to deal with protracted structural challenges, Mr. Kim continued, which led to mounting competitiveness problems, poor labor market outcomes, large current account deficits, high and volatile inflation, and periodic exchange rate pressures. Weak public institutions and large fiscal imbalances also contributed to a rapid buildup of public debt in the past (Figure 1).
Attempts to stop the growth of public debt, including through measures contained in IMF-supported programs in 2009 and 2011 as well as short-run adjustment measures introduced in 2013, proved insufficient. In light of the unsustainability of previous policies, Mr. Kim reported that in 2014 the Serbian authorities took stronger policy ownership and started a new IMF-supported adjustment program to address the growing imbalances in a more fundamental manner. More specifically, the three-year precautionary Stand-By Arrangement (SBA) (200 percent of quota, or about €1,122 million), approved by the IMF board in February 2015, aimed to restore fiscal sustainability, bolster growth, and boost financial sector resilience. On the fiscal front, the objective was to reverse the rise in public debt by 2017 and put it on a downward path thereafter. As Mr. Kim explained, this meant reducing the structural primary fiscal balance by about 3½ percent of GDP in 2015–17.
To achieve this, the Serbian authorities started implementing primarily front-loaded but durable measures to: (1) contain entitlement spending, which meant wage cuts and indexation freezes; and (2) curb state aid by reducing subsidies and eliminating liquidity support to SOEs. Structural fiscal reforms were introduced to support the fiscal consolidation effort, foster Serbia’s medium-term growth potential, and reduce fiscal risks. Among them were comprehensive wage system reform, rightsizing the general government employment, enhancing fiscal transparency, improving public financial management, and reforming tax administration.
The program is delivering good results. On the back of strong policies, Serbia has returned to positive economic growth, employment is rising and unemployment falling. The first review was completed successfully in June 2015: all performance criteria and indicative targets had been met with good margins. That confidence in financial markets is also being restored, Mr. Kim said, is reflected in falling spreads on sovereign credit default swaps, a stable exchange rate against the euro, and more recently, improved banking sector resilience during the Greek crisis in July (Figures 2a/2b).
As for the future, Mr. Kim emphasized that continued efforts to push the structural reform agenda, particularly for SOEs and the public sector employment, and achieving the planned fiscal consolidation objectives will be critical to stabilizing the Serbian economy and sustaining its long-term growth. The nature of fiscal reforms and challenges in Serbia as presented by Mr. Kim reinforced key messages of the course. Audience members appreciated Mr. Kim’s unique insights into Serbia’s fiscal policy implementation and renewed momentum for fiscal reforms.