Belgrade - The International Monetary Fund (IMF) will unfreeze funds from a 4-billion-dollar standby loan to Serbia, which in return must curb spending and reform its social care system, officials said Wednesday in Belgrade.

The head of the IMF mission, Albert Jaeger, said the agreed economic policy framework was "balanced," warning Serbia that it must now implement the reforms.

The IMF is expected to disburse the second 1-billion-dollar tranche in December, after delaying it in September over Belgrade's reluctance to implement harsh spending cuts.

At the end of the third review of Belgrade's economic policy since the standby loan was agreed in March, the IMF sketched a slightly more optimistic outlook for Serbia. Its economy is now expected to shrink by 3 per cent in 2009, instead of the 4 per cent initially forecasted.

Recovery will however be "relatively slow," Jaeger told a press conference jointly held with Serbian government officials. The IMF estimates the Serbian economy will grow by 1.5 per cent in 2010.

Serbia agreed to limit its fiscal deficit to 4 per cent of its gross domestic product in 2010, after 4.5 per cent this year. The shortfall translates to 105 billion dinars (1.62 billion dollars).

Prime Minister Mirko Cvetkovic's cabinet rejected IMF suggestions to raise taxes and instead proposed an administration reform which, along with a freeze of public sector salaries and pensions and additional borrowing, should keep spending within the target in 2010.

In the long run, however, Serbia agreed to reform its pension and disability funds, seen as too generous by the IMF. "The reform begins in 2010, but its full effect will become palpable in 2020," Finance Minister Dijana Dragutinovic said.

IMF and Serbia agreed on the standby credit in March and Belgrade drew the first of the four 1-billion-dollar tranches in May to boost its dwindling foreign currency reserves and prop the faltering national currency.

Since Serbia does not immediately need the second and third tranches, available after the latest review, IMF and Belgrade agreed to extend the standby facility by six months, until October 2011.(dpa)