National Bank of Serbia
External Relations | Relations with IMF | Extended Financial Arrangement 2002

Tenth and Eleventh Tranche of Extended Financing Arrangement

The positive assessement adopted by the IMF Executive Board on June 29, 2005 confirmed the successful completion of the fifth half-year review of the current three-year arrangement with this international financial institution, providing for drawing of the tenth and eleventh tranche in total value of SDR 125 million (around USD 180.3 million) for the support to the country’s balance of payments and foreign exchange reserves.

The Executive Board approved the postponement of the accomplishment of performance criteria determined for end-December 2004, end-February and March 2005, which regard the settlement of due liabilities with reference to external borrowing, reorganization of employees in the Army and the administration of the state union, as well as legal registration of divided parts of the Electric Power Industry of Serbia (EPS).

The IMF Executive Board also completed the consultations referred to in Article IV of the Fund Statute, within which overall economic developments were discussed, as well as issues regarding the adequacy of economic policy and measures undertaken with a view to maintaining stable relations in the economy and harmonization of the country’s balance of payments.

The extended financing arrangement was concluded on May 13, 2002 in total amount of SDR 650 million (around USD 937.7 million) as a support to Serbia and Montenegro’s economic program in the period 2002-2005. On the basis of the Fund’s so far positive assessments, the amount of SDR 587.5 million has been used (around USD 847.5 million). The duration of the three-year financial arrangement with the Fund was extended until December 31, 2005.

According to the arrangement reached with the Fund on the implementation of reconciled objectives of economic policy, the Government of the Republic of Serbia has undertaken obligations that are expected to lead to the successful completion of the current financial arrangement with the Fund, which would provide for the realization of the remaining 15% write-off of the rescheduled debt to Paris Club creditors.

The accomplishment of economic policy reconciled objectives requires the continuation of restrictive monetary policy, with the aim of maintaining macroeconomic stability and lowering the inflation rate. To this effect, the additional measures of the central bank are aimed at the regulation of banking sector liquidity and the amount of circulating money.

The fiscal policy should, through the additional reduction of share of public expenditures exert a downward impact on the inflation rate in this year, by introducing measures aimed at achieving a budget surplus instead of budget deficit. In addition, the reduction of public expenditure should not bear down on investments, and reduced public expenditures should not be compensated by increased prices in these sectors, since this also affects inflation flare-up.

The obligations undertaken in the oncoming period also refer to the implementation of structural reforms, especially as regards privatization and restructuring, as well as allocation of public companies’ subsidiary activities from the main ones, monitored within the program arranged with the IMF.

It is indispensable that measures of fiscal policy be more restrictive in the coming period. After short-term reliance on high revenues, it is necessary that permanent expenditures be lowered (mainly through the implementation of the pension system reform) as well as subsidies, which would trigger the reduction in the volume and overall expenditures of the public sector.

The planned implementation of restrictive monetary policy would help the reduction in demand and subduing of inflationary pressures. The strong pressure of newly founded banks (with the majority share of foreign capital in equity stake) on stepped up lending activity entails a higher level of circumspection and readiness of monetary authorities to undertake, if necessary, further measures of monetary policy by tightening conditions.

The Fund has shown understanding for the currently implemented foreign exchange policy aimed at reducing inflationary pressures, and pointed to the indispensability of supporting this policy by tightening macroeconomic policy and speeding the implementation of structural reforms.

The accelerated implementation of structural reforms in the following period concerns the process of privatization and restructuring of public companies, monitored within the Program, with the need for the further stimulation of the export sector growth and improvement of the mid-term „external sustainability“, i.e. the country’s capacity to service its obligations. The strict implementation of the bankruptcy procedure is also necessary for the reallocation of total resources of the domestic economy.

The consistent implementation of agreed measures of economic policy will serve as a basis for maintaining macroeconomic stability, overcoming certain risks and pushing up the growth rate over the mid-term, which will be crucial for the provision of the further financial support of the international community in economic adjustment and the country’s reform efforts.