By the Blouin News Business staff

IMF’s Serbia investment is paying off early

by in Europe.

Dusan Vujovic, Serbia's finance minister, speaks during the South Eastern Europe (SEE) financial future summit in Becici, Montenegro, on Friday, June 12, 2015. Getty Images

Dusan Vujovic, Serbia’s finance minister, speaks at a conference in Becici, Montenegro, on June 12, 2015. Getty Images

Serbia is finally getting its house in order. On Tuesday, the IMF approved its 2nd review of Serbia’s 3-year $1.35 billion “Stand-By Arrangement,” the economic package that was agreed upon in February. And already there has been good news. The IMF just raised the country’s 2015 GDP forecast from zero growth to 0.5%, soon after it declared that Serbia has “made remarkable progress in the areas of macroeconomic stability and fiscal consolidation.”

“We took a road from almost certain bankruptcy to fiscal consolidation, to a reduced budget deficit, away from a recession that threatened to become a major problem to positive economic growth,” said Finance Minister Dusan Vujovic. But he admitted Serbia will face problems as it conducts further reforms, stressing “We have to complete the privatization process… and increase the efficiency of public enterprises.” A good example is flourishing Air Serbia, 51% of which has been owned by the Serbian government and 49% by Etihad Airways since 2013. International visitors are estimated to contribute $373 million to Serbia’s GDP this year, supporting 22,400 jobs, and by 2020, the tourism-related economic footprint of the airline is projected to increase to $572 million, supporting a total of 28,200 jobs.

To its credit, the country hasn’t been dragging its feet about making tough adjustments. Last week Economy Minister Zeljko Sertic met with IMF officials and announced that there will be “no extension of deadline for privatization.”

On Tuesday, the IMF called Serbia’s fiscal performance in the first half of 2015 “strong,” and praised its general government deficit coming in at 2.75% instead of the 4.75% set under the three-year IMF deal. However, the IMF strongly urged those newly-freed funds to be used to reduce the public debt (at 74% of GDP)—not to partially reverse the pay and pension cuts Serbia made in late 2014 to clinch the loan agreement, as the government had recently indicated. In a compromise, Serbia delayed that decision until the IMF’s next visit in November.

Cooperating with the IMF and enacting economic reforms helps somewhat towards Serbia’s top foreign policy objective of joining the E.U. But more important for that goal is Serbia’s rapprochement with neighboring Kosovo. Last Tuesday those two former foes reached four key agreements — on electricity distribution, telecommunications, the Ibar river bridge, and autonomy for the Association of Serbian Municipalities (in Kosovo) — that the E.U. called “landmark achievements” in their normalization process.

Following that diplomatic triumph, Serbia is “much closer to opening negotiations” about joining the E.U., said Michael Davenport, head of the E.U. delegation in Belgrade. He added that it is now up to the European Commission to propose the next steps and that it would be up to member countries to adopt the decision on the next steps and their pace.

In May, Davenport stated that “Serbia has strong prospects for the E.U. membership and therefore it is part of the E.U. planning process,” so there is even more optimism now. Granted, Serbia still has significant reforms to enact before meeting E.U. requirements. But following the agreements with Kosovo, Davenport added there is now a major chance for Serbia to enter a much more active stage of negotiations, and there is room for the entire process to accelerate in the course of the next year.

Serbia hopes E.U. ascension talks will commence by December, and the forecast looks good.