IMF, Serbian authorities reach staff-level agreement on third review under PCI

BELGRADE - International Monetary Fund (IMF) staff and the Serbian authorities have reached a staff-level agreement on a third review under the IMF's Policy Coordination Instrument (PCI) subject to approval by the IMF Executive Board, the IMF has announced.

"Growth will increase from 2025 but will be adversely affected by spillovers from the war in the Middle East in 2026. In 2027, economic activity will be supported by EXPO-related spending. Driven by higher global energy and commodity prices, inflation is projected to rise moderately and temporarily exceed the upper bound of the NBS tolerance band at the end of 2026 before returning to the band by mid-2027," it said on Wednesday.

"Monetary policy should stay cautious and may need to tighten if higher energy costs feed into long-term inflation expectations and trigger second-round effects.

The authorities are committed to a fiscal deficit ceiling of 3.0 pct of GDP in 2026–27 and to special fiscal rules on public wages and pensions. Fuel excise reductions introduced in March–April 2026 have cushioned the oil price shock but should be withdrawn in the near term to avoid prolonged energy subsidisation and safeguard fiscal sustainability.

The authorities are advancing fiscal-structural reforms. Systematic application of transparent cost-benefit analysis to all new public investment projects is a priority. Faster progress in improving the business environment is needed to strengthen medium-term growth," it said.

An IMF mission led by Annette Kyobe visited Belgrade from April 22 through May 5 to conduct discussions on the third review under the PCI. At the end of the discussions, the mission issued the following statement:

"Like other countries, Serbia is facing significant headwinds from the war in the Middle East. The war is affecting the economy through higher energy prices and elevated uncertainty that are weighing on private investment and consumption. Growth is projected at about 2.75 pct in 2026, rising to 4 pct in 2027, supported by real income gains, new export capacities in the manufacturing sector, recovering agricultural output, infrastructure and energy investment, and EXPO-related tourism.

Inflation has remained muted, helped by temporary fuel excise cuts and little impact from the phase-out of margin and price controls on food and household essentials so far. Reflecting weaker than expected food price pressures from margin and price control phase-out, average inflation is projected to be lower than in the April WEO, at 3.5 pct in 2026 and 4.5 pct in 2027. Inflation is expected to temporarily exceed the upper bound of the NBS tolerance band in late 2026, reflecting the pass-through of higher energy prices, gradual restoration of margins lost by the food distributors when controls were in place, and elevated services inflation following recent wage increases. In 2027, EXPO-related consumer spending will contribute to price pressures but inflation is expected to return to the tolerance band by the mid of the year.

The forecast is subject to unusually high uncertainty. Further escalation of the conflict in the Middle East and the associated additional energy market disruptions — representing a potential adverse scenario — imply considerable downside risks to growth and upside risks to inflation. A resurgence of domestic political tensions or delays in resolving NIS could further weigh on the economy.

Serbia’s strong buffers — moderate public debt, high FX reserves, and a sound banking system — provide a solid foundation to navigate repeated shocks. Preserving prudent and predictable macroeconomic policies remains essential to maintain credibility and mitigate risks. Fuel excise reductions should be withdrawn in the near term to avoid prolonged energy subsidisation and safeguard fiscal sustainability. Monetary policy should stay cautious and may need to tighten if higher energy costs start to feed into broader price increases, for example, through rising wages or higher long-term inflation expectations.

In an adverse scenario of a material and persistent increase in oil prices, Serbia would deploy additional temporary and targeted measures to support a smoother macroeconomic adjustment and protect vulnerable households. The authorities would seek to accommodate these costs within the 3.0 pct of GDP fiscal deficit ceiling through further reprioritisation of capital spending.

Serbia is advancing fiscal-structural reforms. The authorities have published the first actuarial analysis of the pension system and are preparing their first tax expenditure report, alongside implementing key recommendations from last year’s IMF Fiscal Transparency Evaluation. The Fund is supporting the Serbian Tax Administration in addressing staffing constraints, advancing digitalisation, and strengthening VAT compliance. The Fund is also providing technical assistance to improve public investment management, which should enable systematic cost-benefit analysis of all new public investment projects as the basis for transparent and effective project selection. Prompt clearance of domestic arrears and measures to prevent new arrears in the state-owned enterprise (SOE) Roads of Serbia are critical.

In the energy sector, recent improvements in governance should be preserved while faster progress with SOE reform to improve efficiency is essential, particularly as Serbia prepares to undertake large energy investments. Annual inflation-linked indexation of household tariffs, in line with international practice, would support the financial sustainability of energy SOEs. Strengthening payment discipline of debtors to energy companies is a matter of social fairness and critical in a context of costlier energy. The new domestic carbon tax will help Serbia adjust to the EU’s CBAM and support a shift toward more efficient production and energy use.

Against the backdrop of a tight labor market, future growth will increasingly depend on productivity gains, requiring faster progress in improving the business environment. Priorities include strengthening the effectiveness of the judiciary in business-related cases, maintaining labor market flexibility, and simplifying business regulation, licensing, and inspections. Trade facilitation reforms can further support Serbia’s integration into European markets while helping reduce costs for Serbian consumers.

The authorities and IMF staff will remain in close consultation as economic conditions evolve, to ensure continued progress toward program objectives," the statement said.