The strong credit growth in Serbia has started eroding financial stability, IMF said in a report that assesses the financial system of the country. The Fund underlined the high level of euroization and the fact that almost all credits extended are in euro, which exposes borrowers (and thus indirectly the lenders) to considerable foreign exchange risks. Concern stems from the fact that the share of non-performing loans of foreign banks was on the rise. The IMF also highlighted the vulnerability of the remaining state banks with regards to inefficient governance.
In order that risks for the financial system are minimized, the Fund recommended implementation of the recently adopted law on banks, improvements in the institutional capacity and in management practices, as well as continuation of the privatization process. The measures of the central bank to limit credit growth last year were not successful, IMF noted. Thus it recommended much tighter fiscal, income and monetary polices, which should be coupled with reforms in the real sector. On the positive side it was noted that the entry of a number of foreign banks in the last one and a half years contributed for strong growth of financial intermediation as the ratio of bank assets to GDP is estimated at some 10% of GDP at the end of 2005.
IMF stated that the robust development of the banking sector supports economic growth but expressed concerns with the fact that the financial sector of the country was very unevenly developed. The Fund pointed the small and inefficient insurance sector and called for its restructuring including through the privatization of the two largest players (Dunav Osiguranje and DDOR Osiguranje). Despite the rising interests in the Serbian capital market, it continues to be underdeveloped and investors face a number of difficulties such as relatively low transparency and inefficient regulatory framework.