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Serbia and the International Monetary Fund have agreed a new non-financial and advisory deal tailored to help Belgrade maintain growth during and after the Covid-19 pandemic, the lender said in a statement on Friday.

Serbia's economy contracted 1.1 per cent last year, less than its regional peers, mainly due to a substantial policy response to the pandemic, the IMF said.

"Policies should continue to support people’s lives and livelihoods until the economic recovery is fully entrenched," it said.

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The new Policy Coordination Instrument (PCI), an IMF non-financial and advisory tool, is set to last until 2023. It would help Belgrade improve the business environment, strengthen the rule of law and reform state-owned firms and environmental policies.

A previous three-year PCI arrangement expired last year.

The Serbian parliament on Thursday amended the 2021 budget to mitigate effects of the pandemic, increasing the deficit to 6.9 per cent of economic output from 3 per cent.

Spending includes a 2.5 billion euro ($3.02 billion) package of subsidies and payments to businesses and citizens to help weather the crisis.

The IMF warned that further budget support should be targeted at the most vulnerable households, firms and sectors.

"Investments in infrastructure and environmental protection can also support near-term growth," it said.

The lender affirmed its 2021 growth forecast for Serbia at 5 per cent of GDP.

But the economic recovery of the European Union candidate is still uncertain due to the course of the pandemic in Serbia, which has a strong nationwide Covid-19 inoculation campaign, and its trade partners, the IMF said.

The new agreement with Belgrade is expected to be approved by the IMF Executive Board in mid-June.

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