The following statement was issued today in Belgrade by an International Monetary Fund (IMF) mission:

"An IMF mission visited Belgrade from July 14-22, 2005 to review economic developments and the implementation of the government's economic program. Inflationary pressures persist, but current account developments are encouraging. Progress in the implementation of the agreed commitments has been uneven and risks remain in some areas.

"The mission has met in Serbia with the Prime Minister, the Deputy Prime Minister, and many cabinet members. During these meetings, the mission stressed that all program commitments and policies, as stated in the government's MEFP of June 8 presented to the IMF Board, must be implemented in full for discussions on the sixth review to be initiated. The mission expressed concerns regarding monetary policy, pension, and energy sector reforms.¹

"The mission also met with a number of other economic stakeholders. The mission held very informative talks with union representatives from the Pancevo refinery and representatives of the pension association. Meetings were also held with private business, bankers, and the diplomatic community.

"While in Serbia the external current account deficit has declined in the first five months of the year, inflation-although somewhat stabilizing-remains high. There were contrasting macroeconomic development in the first half of 2004, as the exceptional growth in the fourth quarter of 2004 is unwinding through lower imports and domestic production. Exports performed strongly, pulling the export-oriented and restructured sectors, while domestically oriented sectors were weak, suggesting a slowdown in domestic demand that may reflect both the restrictive policies implemented since late-2004 and the temporary effect of the VAT introduction.

"Looking ahead, macroeconomic risks remain high. The slowdown in credit growth may alleviate some demand pressures, but foreign borrowing is expected to continue strongly, potentially fueling import demand. High world oil prices and the adjustments to electricity tariffs are expected to have an adverse impact on inflation, and the authorities should maintain tight fiscal and monetary policies and stand ready to take timely additional measures to keep the program on track.

"There is good progress in the implementation of many program conditions. The mission congratulated the authorities in particular for the passage of the rebalanced budgets of the central government and the city of Belgrade, the strong revenue performance, the good progress in the spin-off of non core enterprises, the auctions by the Privatization Agency, and the very good results in the sale of remaining state-owned banks, as well as the passage of the leasing law. However, program implementation risks remain high in a few areas.

"The mission learned that some elements of the agreed pension reform are still being discussed. The mission emphasized that the specific reform commitments need to be observed to ensure the medium term sustainability of the pension reform.

"The privatization of a majority stake in the two NIS refineries by early 2006 is a critical structural reform commitment under the program. To initiate this process, the government should hire advisors in the near future. The mission also advised the government against any large loan commitments and investments by NIS, as they could undermine the prospects of a successful privatization.

"Monetary policy needs to remain steady and tight to address inflationary pressures."