Serbia's economy will shrink by 4.0 percent in 2009 and then begin a 'modest recovery' with 1.5 percent growth in 2010, the head of an IMF delegation said on Tuesday. 'We expect output in Serbia to stabilize in the second half of the year consistent with the output decline of four percent for 2009 as a whole,' Albert Jaeger told reporters at the end of his visit. 'Next year, a modest recovery of 1.5 percent is projected and risks to the growth outlook are now more balanced,' he added. Serbia's central bank has warned that the economy could contract 6.0 percent in 2009, an abrupt turnaround from the 6.0 percent growth forecast before the onset of the crisis late last year. The International Monetary Fund earlier this year agreed to provide Serbia with a 3.0-billion euro (4.3 billion-dollar) emergency loan. Serbia has already drawn down 788 million euros from the arrangement. The accord with the IMF called for a budget deficit limited to 3.0 percent of Gross Domestic Product (GDP). But Jaeger said there was now an 'agreement to raise the deficit target from 3.0 to 4.5 percent of GDP, given the need to avoid excessive tightening in a period of output weakness.' However, since the IMF mission and the Serbian government failed to agree on exact measures on how to bridge the budget deficit in 2010, approval of a second installment of the standby loan has been postponed until October, Jaeger said. 'We have not completed the review. Now the idea is to combine it with the next one scheduled in October,' he said. 'If by that time we reach an agreement ... the combined second and third tranche would be available to Serbia,' he said, putting those funds at around 1.4 billion euros. According to Jaeger, the IMF is in favor of increasing value added tax (VAT), which Serbia is trying to avoid, offering cuts in the public sector instead. The talks will continue in late October, Finance Minister Diana Dragutinovic said. Jaeger said 'broad agreement' between Serbia and the IMF had been reached 'on initial steps in medium-term structural reforms in the areas of public administration, large state enterprises and local utilities, pensions, health and education.' Serbian Economy Minister Mladjan Dinkic said Belgrade was determined to rein in public spending, indicating that there could be a 10 percent reduction in the number of civil servants starting from January. 'The key point is to reduce the public sector to a level comparable with EU countries that we want to compare with,' Dinkic said. Dinkic said Serbia would meanwhile draw down 600 million dollars (420 million euros) of its special drawing rights held by the IMF to cover the budget deficit. The allocation of SDRs was done in late August for all IMF members in order to boost their liquidity and was not related to the standby arrangement, Jaeger said. 