1. The Global and Serbia’s Economy Lecture at the Economic Faculty Belgrade, May 22, 2012 Bogdan Lissovolik IMF Resident Representative for Serbia

2. Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy?

3. Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy?

4. W HAT IS IMF ? G LOBAL M EMBERSHIP W HAT IS IMF ? G LOBAL M EMBERSHIP 187 COUNTRIES REPRESENTED N ON - MEMBERS INCLUDE : C UBA, N ORTH K OREA, A NDORRA, M ONACO, N AURU, L IECHTENSTEIN 187 COUNTRIES REPRESENTED N ON - MEMBERS INCLUDE : C UBA, N ORTH K OREA, A NDORRA, M ONACO, N AURU, L IECHTENSTEIN M ANDATE : G LOBAL E CONOMIC & F INANCIAL S TABILITY S HORT - TERM BALANCE OF PAYMENT SUPPORT F ACILITATE EXPANSION IN TRADE, HIGH LEVELS OF EMPLOYMENT AND INCOME S HORT - TERM BALANCE OF PAYMENT SUPPORT F ACILITATE EXPANSION IN TRADE, HIGH LEVELS OF EMPLOYMENT AND INCOME P ILLAR OF M ULTILATERALISM P ROMOTES ECONOMIC COOPERATION C OMPLEMENTS THE UN, W ORLD B ANK, WTO & ILO P ROMOTES ECONOMIC COOPERATION C OMPLEMENTS THE UN, W ORLD B ANK, WTO & ILO

5. Where are we? Output Growth, 2011Q4

6. Where are we? Public Debt (% of GDP)

7. Where are we? 10-Year Government Bond Yields

8. Where are we? Capital Flows to Emerging Markets and Developing Economies ($US billion; weekly) Greece Crisis Ireland Crisis ECB LTRO

9. Where are we? Unemployment rates

10. Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy?

11. Where are we going? Output Growth, 2012-13

12. Where are we going? The Brakes: Fiscal Consolidation (change in the structural balance; percentage points of potential GDP)

13. The Brakes: Bank Deleveraging Where are we going? Projected Fall in Bank Lending Supply, 2012-13 Effect of Deleveraging on Output Level (% deviation from no-deleveraging scenario)

14. What Are The Drivers Of Bank Deleveraging? Structural drivers… Balance sheet clean-up and shedding of legacy assets Better capitalization Reduce reliance on less stable funding sources... shaped by cyclical financial and macro conditions Under adverse conditions capital generation more difficult Funding pressures could also place strains on banks 10

15. Where are we going? Real GDP Growth Sept. 2011 WEO Advanced EconomiesEmerging and Developing Economies

16. Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy?

17. What are the risks? RISK 1: Euro Area Crisis RISK 2: Oil Prices

18. BANKS vicious cycles FISCAL GROWTH What are the risks?

19. BANKS vicious cycles FISCAL GROWTH What are the risks?

20. Exports of Goods to the Euro Area (2010) Euro Area Bank Claims (% of GDP; Sep. 2011) Euro Area Emerging Europe Other Adv. Europe CIS MENA SSA Dev. Asia LAC Adv. Asia USA+CAN Emerging Europe Other Adv. Europe USA+ CAN LAC CIS MENA Adv. Asia SSA

21. What are the risks? RISK 1: Euro Area Crisis RISK 2: Oil Prices

22. What are the risks? WEO Downside Scenario for a Disruption in the Global Oil Supply (% deviation from WEO baseline)

23. What are the risks? WEO Downside Scenario for a Disruption in the Global Oil Supply (percent or percentage point deviation from baseline) GDP Loss after Two YearsRise in Inflation after One Year

24. Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy?

25. What needs to be done? (policies) Fiscal policies: gradual consolidation Monetary and liquidity policies should continue to be accommodative, if possible Well-coordinated policy package – in most countries Structural reforms to boost long-term productivity and employment Support for the unemployed (social policies) More international coordination of macro-financial policies Strengthening the global firewall Macro-prudential policies need to be strengthened

26. What needs to be done? (policies) Implementation of a clear medium-term fiscal adjustment plan is a key requirement for sustainable growth, with support of fiscal institutions Fiscal policy Growth enhancing measures are very important for the fiscal accounts! Fiscal adjustment should proceed at a steady pace (if there is fiscal space); not too fast not too slow Challenges:  Secure adjustment/reform without immediate market/political pressure  Difficult dilemma if there is not fiscal space – no access to borrowing with high deficits…

27. FISCAL ADJUSTMENT Insufficient adjustment could undermine fiscal credibility and lead to fiscal crises, which would be bad for growth Too much fiscal adjustment could weaken aggregate demand, which would be bad for growth Fiscal consolidation: Goldilocks Principle: “Not too hot, not too cold, just right” – depends on the specific circumstances

28. What needs to be done? (policies) Challenges:  When and how to tighten monetary policy? – some program are time-limited  If inflation re-emerges while financial system/recovery is still fragile -- a difficult trade-off…  Restructuring central bank balance sheets after unconventional policies  How to respond to the oil shock?  What if fiscal consolidation sputters?  How to communicate to anchor expectations?  The challenge of unbalanced external position and foreign currency dominance in emerging markets – constrains scope for looser monetary policy. Monetary policy Monetary and liquidity policies should continue to be accommodative -- in most countries, especially as weak demand continues to kip a lid on inflation;

29. What needs to be done? (policies) Challenges:  How to reduce reliance on unstable funding sources?  How to limit de-leveraging?  How to deal with NPLs and legacy assets?  How to regulate cross-border transactions? Macroprudential policy Adequate financial regulation, supervision, capitalization, liquidity, and crisis-management frameworks.

30. What needs to be done? (regions/countries) Building a stronger currency union Improved fiscal rules and institutions Strengthening banking systems Euro Area

31. What needs to be done? (countries/regions) Rebuilding macroeconomic policy room Strengthening prudential policies and frameworks Promoting more inclusive growth Most Emerging Market and Developing Economies

32. What needs to be done? (countries) Fostering domestic consumption, including through more exchange rate flexibility Economies with Large External Surpluses Economies with Large External Deficits Developing a domestic policy mix to gradually rebalance toward a sustainable export-oriented growth, based on FDI and prudent macroeconomic policies

33. Outline Where are we? Where are we going? What are the risks? Serbia’s economy? What needs to be done?

34. The “old-model” problem…

35. Still-large External Deficit

36. And relatively high unit labor costs

37. With real wage outpacing productivity

38. And public debt becoming a problem

39. Fueled by public spending

40. With pension spending especially high

41. What to do? ✤ 1. Fiscal consolidation through structural reforms of spending (pensions, wage bill) ✤ 2. Product market reforms ✤ 3. Labor market reforms

42. Attract the right kind of FDI

43. Reform severance benefits

44. Thank You