IMF: The Serbian economy’s recovery has continued, but it lacks strong momentum.

The economy’s recovery has continued, but it lacks strong momentum. Although Serbia compares well with neighboring peers, GDP growth in 2010 is unlikely to exceed 1½ percent. Moreover, growth is not yet broad based, and its pace is insufficient to generate employment growth. Concerns about spillovers from the Greek crisis have subsided, but risk premia remain elevated. Investors remain bearish both on the dinar and on sovereign debt, as reflected in high sovereign spreads. As a consequence, demand for the government’s dinar T-bills has been disappointing, with auctions on longer-term T-bills in particular undersubscribed.

Upside risks to inflation have increased, notwithstanding the weak economy. Inflation fell below the NBS lower tolerance band during the first half of 2010, but moved back within the band in July. Reflecting mainly rising food prices and the pass-through from the significant dinar depreciation in recent months, inflation is now projected to increase above the NBS’s target of 6 percent at end-2010, but move toward the center of the target band in 2011. In response to these new inflation concerns, the NBS has recently reversed its easing stance, hiking the policy rate in two steps cumulatively by 100 basis points to 9 percent.

News source: IMF link: publication