(Updates dinar in 11th paragraph.)
July 19 (Bloomberg) -- Serbia’s government won’t relax its fiscal policies ahead of an election next spring as it continues to reduce the budget deficit toward the European Union’s 3 percent limit, Prime Minister Mirko Cvetkovic said.
Cvetkovic, a member of the ruling Democratic Party, is the first Serbian premier since 2000 to lead a Cabinet for its full, four-year term. His case for re-election has been bolstered by the Balkan nation’s economic recovery after a recession forced it to seek an international bailout.
“We will not give up the fiscal rules which envisage a reduction of the budget gap through 2015 toward a balanced budget,” Cvetkovic, 60, said in an interview in Belgrade today. The government has set fiscal deficit targets of 4.25 percent of gross domestic product for 2011 and 3.2 percent for 2012 and limiting public debt to 45 percent of GDP.
In power since 2008, Cvetkovic’s ruling coalition has led the country through the worst recession since the fall of communism, which halted capital inflows and investments, leading the dinar currency 40 percent down between late 2008 and 2010, cutting demand for Serbian-made goods and resulting in a 5 percentage-point increase in unemployment to 22.2 percent.
Economic growth will accelerate to 4 percent next year and 4.5 percent in 2013, mainly led by investments from Fiat SpA, compared with 3 percent in the first quarter, Cvetkovic said, sticking to the government’s current forecast. The International Monetary Fund sees the economy expanding 4.5 percent in 2012.
(For comments from Cvetkovic on Serbia’s bond sale plan, click here.)
The government has set joining the world’s largest trading bloc as its top priority and stepped up the fight against corruption and organized crime. It also needs to improve its judicial system to meet EU standards. The European Commission is to issue its opinion on Serbian membership on Oct. 12.
Serbia is using its improved relations with the EU to close the gap with the 10 former communist countries in eastern Europe that have joined the trading bloc since 2004. GDP per capita was $5,260 last year, compared with $13,527 in Croatia, a former Yugoslav republic that is in talks to enter the EU, and $38,600 in Germany, according to the IMF.
“Serbia’s GDP growth in the first quarter relied much on export markets,” said Cvetkovic, who has been finance minister since mid-March when he shuffled his government. “Inflation at the end of the year should be in the single digits. We have overshot the 6 percent limit set by the central bank but it will be in the single digits and under control.”
Policy makers in Belgrade have lowered borrowing costs by three-quarters of a percentage point to 11.75 percent in the past two months on the assumption that price growth has peaked. Serbia has seen a rise in its risk premium, which along with Europe’s sovereign-debt crisis weakened the Serbian dinar, central bank Governor Dejan Soskic said on July 11. Consumer prices grew a European-high 12.7 percent on the year in June.
Southeast Europe, including Serbia, Romania and Bulgaria is most at risk, because of its proximity to Greece, and an escalation of the crisis would hurt more western European banks, Erik Berglof, chief economist at the European Bank for Reconstruction and Development, said on July 14.
Cvetkovic said, though, that he doesn’t think the crisis will weaken the currency further and it will likely “track euro moves” in the coming months. The dinar traded at 104.09 to the common currency at 5:13 p.m. in Belgrade. It has lost 7.23 percent since May 31, making it the worst performer among the 178 currencies tracked by Bloomberg.
Serbia and the IMF are discussing a new, 18-month precautionary agreement which won’t exceed 1 billion euros ($1.46 billion), Cvetkovic said. Authorities hope to refrain from drawing on that amount except in the case of sudden changes in short-term capital inflows, soaring global commodity prices or a negative impact from highly indebted countries of the euro area, he said.
“It would be wrong to assume that Serbia’s fiscal and debt problems are anywhere close to those of Greece and Italy,” he said. “We borrowed 1.5 billion euros from the IMF and Greece wants to borrow 110 billion euros. Our total GDP is somewhere between 32 billion and 33 billion euros and we have a problem with several hundreds of millions of euros.”
--Editors: Alan Crosby, James M. Gomez
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