IMF calls for more progress on Serbian currency

Serbian authorities need to make more progress on replacing foreign with domestic currency, an International Monetary Fund staff report said.

The report nonetheless praised Serbia’s central bank for dealing firmly with forex instability and said the country’s economic stability was now firmly rooted.

Serbia is not a member of the European Union, but the euro has been its dominant currency for much of this century and is still widely used.

In December 2018, the Serbian authorities and the IMF agreed the latest revised version of their “dinarisation” plan to revive use of the domestic currency. The four main elements of this were preserving macroeconomic stability, increasing dinar-denominated debt, managing foreign exchange exposures and improving co-ordination between the different financial authorities.

But IMF staff cautioned over likely problems in achieving some of these goals, the report said: “Dinarisation of credit, loans and deposits had still stagnated and, given exchange rate stability, the incentive to hold dinars remains low.”

IMF staff welcomed a formal agreement between the central bank and the finance ministry on exchanging information, and joint committees on liquidity management. They also praised the central bank’s new survey of banks’ exposures to unhedged borrowers, which began in April. The survey aims to understand how banks deal with borrowing in foreign currency, and the extent of unhedged borrowing.

The report said the central bank had dealt effectively with a possible appreciation of the dinar against the euro in February, buying €580 million ($646 million) to dampen pressure. The report said the central bank had net foreign reserves of €11.5 billion at the end of March.

IMF staff said that now Serbia had achieved macroeconomic stability, the authorities needed to bring about greater exchange rate flexibility. In particular, the staff called for “greater two-way exchange rate movement to be developed gradually over the medium term”. They argued this “could help further develop the forex market and promote awareness of the risks due to open currency positions”.

Staff at the National Bank of Serbia “noted these priorities, and indicated that relative exchange rate stability was important”, the IMF report said. NBS officials told the IMF that “with still-low levels of dinarisation, preserving financial stability is especially important”.

The IMF staff said Serbia’s domestic credit conditions were favourable, saying credit had risen year-on-year in April by 12% to households and 8% to firms. The report also praised the country’s strong fiscal performance.

Euro still widely used

The Serbian dinar was almost completely replaced by first the German deutschmark and then the euro after the country suffered high inflation during the 1990s. The nationalist regime of Slobodan Milošević fought a number of wars in other former Yugoslav republics, which it financed largely by inflation.

The dinar was devalued four times against the deutschmark between 1990 and 1994, until it was formally pegged against the German currency. In 2000, it was again devalued by 400% against the euro. Official figures put Serbian inflation at 100% that year, though unofficial estimates were much higher.

The central bank has since made considerable efforts to bring inflation down. Serbian year-on-year inflation fell to 1.5% in June and has not risen above 4% in the last five years. The NBS cut its policy rate by 25 basis points to 2.75% on July 11, its first change since April 2018. 

In their report, the IMF staff said the central bank’s “current accommodative monetary policy stance remains appropriate in light of low inflation”.

Serbian use of the euro peaked in 2007, according to research from the European Bank for Reconstruction and Development, but remains widespread. In 2011, Serbian authorities issued their first dinar-denominated bonds, with three-year maturities.