of the financial system. implementation of basel iii in the eu, planned as of the next year, will most probably bring new challenges and further reduce the exposure of eu banking groups towards countries of central and eastern europe. however, encouraging banks to tap longer - term and more stable sources of funding and resorting to alternative ways of funding, chiefly in regard to domestic saving and funds of international financial organisations, may mitigate negative consequences of these processes. when it comes to serbia, it should also be borne in mind bis central bankers ’ speeches that deleveraging may help lower the degree of economy ’ s euroisation as a lower volume of foreign exchange sources of funding will encourage banks to obtain and lend funds in the domestic currency to a greater extent. in the current circumstances, it is obvious that the achievement of sustainable external equilibrium and credibility of fiscal policy are paramount for the improvement of serbia ’ s credit rating and a stable inflow of foreign direct investment and other forms of foreign capital. as i have already underscored, depreciation helps reduce external disequilibrium, primarily over the short run, by ensuring price competitiveness of the domestic economy. however, it does not eliminate the main causes that brought about the deepening of this disequilibrium. the key to the lasting removal of external disequilibrium and ensuring sustainable economic growth are structural reforms directed at productivity growth and economic competitiveness. a better credit rating will enable more favourable borrowing in foreign markets and a more stable inflow of foreign capital needed to finance new investment and encourage employment. this will ultimately contribute to the stability of the foreign exchange market and facilitate operation of the corporate sector. provided the government takes decisive steps in implementation of key reforms of the tax and pension systems, including corporatisation of the public sector, it is highly probable that serbia ’ s credit rating will not only be sustained but upgraded as well. in contrast, further widening of the fiscal deficit would bring about a higher public debt and deterioration in external liquidity. therefore, in defending the country from the current crisis, economic policy makers face numerous limitations. some of these limitations also represent a chance to set the country ’ s economic growth on long - term stable foundations, which should be the centrepiece of any responsible economic policy. on its part, the national bank of serbia will continue to stabilise inflation at a low level and maintain a sound financial system, this being the best way to help the economy in the current circumstances and

serbia. the second pillar of defence against the crisis may be a countercyclical fiscal policy, that is, the stimulation of domestic demand during the time of recession. however, the scope for implementing countercyclical fiscal policy is usually smaller in developing countries. it narrows down even further with the swelling of fiscal deficits in times of crisis, sounding alarms on public debt sustainability in many countries. that is why experts recommend fiscal consolidation instead of fiscal expansion. true, in the short run, fiscal consolidation negatively impacts gdp, but in the medium and long run it lays groundwork for sound and sustainable economic growth, which strengthens investor confidence and pushes down the country risk premium. when there is not much room for countercyclical fiscal policy, it is expected that monetary policy should provide a boost to economic activity. however, its countercyclical potentials depend on the nature and strength of inflationary pressures. as opposed to the demand - side shocks, the supply - side shocks, such as the current food price shock in serbia, are usually not addressed by monetary policy because these are temporary shocks with relatively shortlived effects. however, if they trigger an increase in inflation expectations and other prices and jeopardise price stability despite the strong disinflationary effect of aggregate demand, bis central bankers ’ speeches monetary policy tightening is inevitable. in other words, such circumstances considerably narrow down the scope for boosting economic activity through monetary policy. the efficiency of monetary policy in serbia is most constrained by the high degree of euroisation of the domestic economy, which makes the foreign exchange risk the key risk to financial stability. note that while banks are not exposed directly to the foreign exchange risk since the currency structure of their assets and liabilities is matched, it is the borrowers who take the major brunt of this exposure. and the exposure of the government, corporates and households to sudden and significant changes in the exchange rate may have serious implications for financial stability through the conversion of foreign exchange risk into credit risk. as confirmed by the stress tests implemented by the national bank of serbia, the stability of our financial system is not under threat despite the high share of non - performing loans ( npls ). in september, serbia ’ s npl ratio reached 19. 9 % and was the highest in the region. however, it was in serbia too that the npl ratio recorded the smallest increase since the beginning of the crisis. satisfactory stability of our banking system is also confirmed by the