The International Monetary Fund (IMF) is nearing the end of its sixth precautionary arrangement with the Serbian Government. In its latest report, released on December 12, the IMF offers a cautiously optimistic assessment of Serbia’s economy, expressing the expectation that, after the arrangement ends, the Government will be able to pursue an expansionary fiscal policy (increased spending) while maintaining fiscal discipline.
This assessment is based on two key assumptions. The first is a projected economic growth rate of four percent annually until the end of 2029, which would significantly outpace the growth of economies in the Western Balkans and the Eurozone. The second assumption pertains to the reform of fiscal policy institutions—specifically, the introduction of the PIMIS platform, which enhances transparency in public finances and improves management of fiscal risks.
The two weakest links to sustainable GDP growth
How did the IMF arrive at its optimistic growth projections for Serbia? For several years, the country’s economic growth has been driven by increasing capital investments, which, alongside controlled public spending, directly contribute to the growth of national output. For example, if the government allocates 100 million euros from the budget for the construction of a stadium, the value of that stadium is added to GDP, and the national product increases by that same amount. Essentially, this model mirrors China’s concept of political capitalism, a model that has enabled China’s economy to achieve above-average, continuous growth for over four decades.
However, due to the declining population, sustainable economic growth in Serbia can only be achieved by increasing productivity. In this context, investing in a factory for robots makes sense, but investing in a national stadium does not.
The question then arises: Can such a growth dynamic in Serbia be sustained indefinitely? The IMF’s growth projections for Serbia are based on a model whose core assumptions are outlined in Annex 5 of its 2023 report. This model, essentially a modified version of Solow’s economic growth model from 1956, highlights two key factors for long-term economic growth sustainability: continuous growth in the labor force and the allocation of capital investments to sectors that enhance labor productivity.
In Serbia’s case (and the entire region), demographic trends present a significant challenge. The population is shrinking, and unemployment is decreasing, meaning there is less available labor. As a result, sustainable growth can only be achieved through increased productivity. In other words, capital investments must target areas that will create a technological environment in which tomorrow’s workers can produce more in the same amount of time than yesterday’s workers. However, the current structure of capital investments in Serbia does not align with this objective. According to the IMF’s data from last year, 80 percent of capital investments are in physical infrastructure—buildings, factories, and transportation networks—while only four percent is allocated to information technologies and software. To increase labor productivity, the current investment pattern must shift to favor sectors that enable productivity growth, the IMF argues. These figures were presented in the 2023 report but not in the two reports released this year.
The “Leap into the Future” program and its imbalance
The capital investment program “Leap into the Future – Serbia Expo 2027” further illustrates this imbalance. The majority of the funds will be directed toward building transportation and energy infrastructure. However, to ensure that capital investments increase productivity, more investments must be made in workforce education, innovation and new technologies and digital infrastructure, which would stimulate innovation and raise productivity across all sectors. In this model of growth, investing in a robot factory makes sense, but investing in a national stadium does not.
Many secrets surrounding the use of public funds for capital investments
Beyond economic growth, the IMF emphasizes the importance of institutional reform and transparent management of public finances. This recommendation likely stems from experiences with the ambitious “Serbia 2025” program, which began in 2019 and projected a 14 billion euro expenditure, but details about its implementation are scarce. As of now, the government is proposing a similar new program, called “Leap into the Future,” which aims to spend 18 billion euros from 2024 to 2027. Naturally, the IMF is keen to ensure that these 18 billion euros are better managed this time.
In this context, the IMF first proposed limiting the budget deficit to 1.5 percent of GDP, down from the current 3 percent. Initially, the Serbian government agreed to implement this fiscal rule starting in 2025, but this plan has since been abandoned. According to the latest IMF report, the implementation of this rule has been postponed until 2029. The main control over public finances is expected to come from the new digital platform PIMIS (Public Investment Management Information System), which the Serbian government introduced this year with IMF support. Its purpose is to centralize data on public investments, increasing transparency and improving fiscal risk management. By consolidating all projects in one place, the platform will allow real-time tracking of funds and provide a clearer picture of how money is spent upon completion of each project. Such a platform would be useful—for example, if it had been in place in 2019, we would have easy access to the full overview of the “Serbia 2025” projects and the exact amount of public funds spent.
However, PIMIS has limitations. While it enables insight into public fund usage, access to the platform is restricted to government officials, and the wider public remains excluded. Additionally, it remains uncertain whether PIMIS will cover all capital projects under the “Leap into the Future” program, given that in 2023, the government issued a decree excluding those projects from the public procurement system, further weakening control and oversight mechanisms.
The only assurance in the latest IMF report is the government’s promise that the “Public Procurement Office will continue to regularly publish reports, at least annually, on all procurements, including those excluded from the regular public procurement regime, along with the rationale for these exceptions.”
Four key fiscal risks
A significant achievement in structural fiscal reforms is the introduction of a model for assessing fiscal risk, which was first presented in the Fiscal Strategy for the period 2025–2027. This model identifies four primary sources of risk: state-owned enterprise operations, local government activities, legal disputes and natural disasters. The Serbian budget is the ultimate guarantor of any costs arising from these areas. However, the strategy remains vague about the greatest risk—the projects financed by the Serbian budget. Public funds are mentioned only indirectly in the model. For example, when a public enterprise faces financial difficulties, it is bailed out with budget funds. But the unresolved question is how to ensure that public funds are used responsibly and effectively. In recent years, a large number of budget projects (e.g., Corridor 10 or the Fruška Gora Corridor) started with one cost estimate, only to see expenses rise dramatically without explanation.
Fiscal risk increases with budget revisions
Fiscal risk especially increases during budget revisions. For instance, the government may initially plan spending, which is defined in the fiscal strategy and appears in the original budget. However, during revisions, certain costs can surge multiple times without any explanation. This has occurred in the 2023 and 2024 budget revisions, particularly with projects related to Expo 2027 and the National Stadium, which are two flagship projects under the “Leap into the Future” program. Unfortunately, the new fiscal risk management model does not address such situations, and these scenarios could undermine fiscal stability and threaten the country’s key economic goals.
