Bloomberg News

Serbia to Cut 2012 Budget Gap Amid Slowing Growth, IMF Says

November 16, 2011

Nov. 16 (Bloomberg) -- Serbia agreed with the International Monetary Fund to cut its budget deficit to 4.25 percent of gross domestic product next year, said Mark Allen, the fund’s senior regional representative for central Europe.

Serbia’s economy, which relies on exports to countries such as Italy and Germany to maintain growth, will probably expand 1.5 percent next year compared with a previous forecast of 3 percent, Allen said in an interview today in Belgrade. The Washington-based IMF left its growth outlook for the Balkan nation this year at 2 percent.

“This is entirely due to deteriorating growth prospects outside Serbia,” Allen said, adding next year’s budget shortfall will be trimmed by a quarter-point. “We see no growth at all in the European Union next year and Italy will have a negative forecast.”

Serbia’s economy grew 0.7 percent in the third quarter from a year ago, according to a flash estimate by the Statistics Office on Oct. 31, down from 2.4 percent in the previous three- month period. The Fiscal Council, which oversees the government’s compliance with self-imposed fiscal rules, said Nov. 10 that GDP will grow 1.5 percent in 2012, half the previous forecast.

The budget for next year doesn’t include tax increases and wage and pension increases which have already been announced, he said. Inflation is set to slow to the central bank’s target by the first quarter, Allen said.

Downward Risks

There are downward risks for Serbia, though the IMF doesn’t see them emerging soon, Allen said. While the current-account deficit will widen about one percentage point to 8.5 percent of GDP as Fiat SpA imports equipment for a factory, the deficit isn’t a concern for the IMF, he said.

Public debt is close to, if not above, 45 percent of GDP and the first step toward reducing that will be a smaller fiscal deficit next year, the IMF official said. If public debt to GDP rises, the government will need a medium-term plan for cutting spending in 2012, he said.

The country doesn’t need to rush to borrow on international markets as it has sufficient reserves, Allen said.

“There is a buffer and the government isn’t strapped for cash,” he said. The IMF has an alternative “adverse” scenario for Serbia which would involve “tightening” of fiscal and monetary policy should growth slow more than expected or there is capital flight stemming from the Europe’s debt crisis. In this case, a “flexible” exchange rate is a “good buffer” for the country, he added.

--Editors: Douglas Lytle, Alan Crosby

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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