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IMF: Rapid Credit Growth Threatens Serbia's Financial Stability

The International Monetary Fund recently released an assessment report on Serbia's Financial System Stability stating that the transformation of Serbia’s financial system is bringing important benefits, but there are emerging signs that the rapid pace of credit growth is beginning to erode financial stability.

IMF's report stated that the main potential threat to financial stability is indirect credit risk arising from the large share of bank lending effectively denominated in foreign exchange. Additionally, a decline in the profitability of foreign banks seeking to gain market share, coupled with an adverse shock—especially an unexpected depreciation, could ultimately result in a credit crunch.

Although the authorities have implemented an array of measures in support of financial stability, IMF stressed further reforms are warranted in the areas of bank supervision and the financial infrastructure.

According to the report, an improved monetary policy and liquidity framework would also enhance stability, as well as make monetary policy more effective.

IMF stated that the ongoing transformation of Serbia’s financial system is bringing important economic benefits.

The entry of foreign banks in recent years has led to a sharp increase in intermediation with credit to the private sector now expected to grow by close to 10 percent of GDP in 2005 alone.

As a result, the financial system is much better able to support economic growth.

An upgrading of the monetary policy and systemic liquidity framework would help mitigate financial vulnerabilities and improve policy effectiveness, stressed IMF experts.

Monetary transparency is improving and the payment system is excellent.

However, monetary operations should become more market-based, a market-based interest rate corridor established, and the lender of last resort facilities refined to meet international best practice.

See full report

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