(Updates with Soskic’s quotes, comment on inflation, from third paragraph)
Jan. 23 (Bloomberg) -- The Serbian central bank urged the government to resolve differences with the International Monetary Fund over the 2012 budget that have delayed the lender’s program review with the country.
Failing to comply with the provisions of the $1.44 billion precautionary arrangement could cause higher borrowing costs for Serbia and jeopardize foreign direct and portfolio investments, Governor Dejan Soskic said in Belgrade today. The IMF postponed the review last week saying Serbia’s budget plan “deviates from the program parameters” and that further talks are needed.
“Narodna Banka Srbije appeals that additional efforts be made for the sake of reaching an agreement and continuation of the arrangement with the IMF,” Soskic told reporters in Belgrade today. “In a situation of international financial instability, the arrangement with the IMF represents additional guarantees for short- and mid-term macroeconomic stability.”
A suspension of the IMF arrangement could destabilize the dinar, increase Serbia’s risk premiums and scare foreign investors away from the country, especially non-residents who would be buying Serbian debt, Soskic said.
The state had pledged to curb the budget gap to 4.25 percent of gross domestic product this year, from 4.5 percent in 2011, while keeping the public debt under 45 percent of GDP. The IMF said on Jan. 19 that planned “issuance of public debt and guarantees and projected implementation of investment projects are in excess of what would be consistent” with the targets.
Serb Premier Mirko Cvetkovic’s economic adviser, Jurij Bajec, said the 2012 budget plan is in line with the targets and that IMF concerns were about perceived risk from public investments in infrastructure, sovereign guarantees and a 100 million-euro capital increase in Komercijalna banka AD, in which the government wants to keep a controlling stake.
A fallout with the IMF could also mean losing financial backing from the countries whose support hinges on positive assessment from the Washington-based lender, Soskic said.
The central bank lowered its two-week repurchase rate by a quarter-point to 9.5 percent last week, amid slowing inflation and the need to maintain growth. Having emerged from recession seven quarters ago, the economy is expected to expand 1.5 percent this year “but we must be prepared for lower than projected activity” and lower revenue, the governor said.
Coping with potential shortfall may include raising the value-added tax rate, which would have a “one-time impact on inflation” that otherwise has been slowing, he said.
Inflation, at an annual 7 percent in December, the is soon expected slow to the target range of 4 percent plus or minus 1.5 percentage points and may even fall below the lower end of 2.5 percent during the second quarter, Soskic said. That would be a “temporary phenomenon” of “just a month or two” before the rate stabilizes within the target range, he said.
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