Bloomberg News

Serbia Can’t Meet IMF Requirements Before Elections, Arsic Says

February 03, 2012

Feb. 2 (Bloomberg) -- Serbia won’t be able to meet requirements set by the International Monetary Fund, whose mission arrives today for talks on adjusting the 2012 budget to original agreements, a central bank board member said.

“Any change to the budget requires parliamentary approval and that is very unlikely to happen before elections,” Milojko Arsic said in a phone interview.

Serbia will have “an additional problem because the IMF is revising down its growth forecast to 1 percent from 1.5 percent,” Arsic said, adding that any revision of the growth target affects budget revenue.

The IMF postponed the first review of its precautionary loan program with Serbia on Jan. 20 because of the budget, which it said “deviates from the program parameters” and especially “issuance of public debt and guarantees.” In addition the IMF said projected implementation of investment projects are in excess “of what would be consistent.”

The “deviation” amounts to around 1 percent of gross domestic product, or at least 300 million euros ($395 million), the lender’s resident representative Bogdan Lissovolik said on Jan. 30. The IMF is not opposing any specific guarantees, rather the overall level of sovereign backing for loans to be taken by public companies and is expecting from Serbia “a credible framework” and “corrective measures.”

Any change to the adopted budget would need approval by the 250-seat parliament, where Prime Minister Mirko Cvetkovic’s cabinet, facing re-election by early May, relies on 126 members.

Budget Approval

Parliament adopted the 2012 budget on Dec. 29, setting revenue at 750 billion dinars and leaving a gap of 140 billion dinars for the central government, a quarter-point below the limit of 4.5 percent of GDP set by Serbian law.

Week-long talks with the IMF are vital for Serbia to keep a 1 billion-euro ($1.3 billion) precautionary loan, which the Washington-based lender approved in September, booking the funds in case Europe’s debt crisis triggers capital flight from Serbia, putting pressure on its dinar and the balance of payments.

On top of a dinar equivalent of $5.6 billion the state needs for this year’s deficit financing and old debt servicing, the government also pledged sovereign guarantees equivalent to $3.9 billion and various project-financing loans from international financial institutions and commercial banks worth another $4.9 billion, according to the 2012 budget.

Recession Woes

Those items equal a third of the Serbian GDP of about 32.9 billion euros at the end of 2011.

The nation of 7.2 million people is still emerging from its worst recession in a decade and the government is trying to keep spending under control and boost tax collection without cutting social benefits ahead of elections. One of the key worries is unemployment rate of 23.7 percent, or 10 percentage points higher than in 2008, at the start of Cvetkovic’s term.

Unemployment and weak domestic demand have helped bring inflation down to 7 percent at the end of 2011.

“There’s an overwhelming feeling that the situation is bad,” said Ivan Nikolic, research analyst at the Belgrade-based Economics Institute, and this week’s withdrawal of the United States Steel Corp. from Serbia may spell trouble for financing of the current account.

“The negative picture is still incomplete because the dinar doesn’t reflect reality,” Nikolic said. If investor interest in the Serbian debt issues wanes, he said, the dinar will “adjust, possibly fueling inflation.” The central bank’s official dinar rate of 105.2939 to the euro yesterday was 1 percent weaker than one year ago.

The current-account gap expanded 34 percent to 2.5 billion euros between January and November 2011, with remittances, portfolio and foreign direct investment gradually shrinking, according to central bank’s balance of payments report.

The economy has already felt the pinch of Europe’s crisis and growth tumbled to an estimated 0.8 percent in the last quarter of 2011 from 3.7 percent in the first three months.

--Editors: Douglas Lytle, Zoe Schneeweiss

To contact the reporter on this story: Gordana Filipovic in Belgrade at

To contact the editor responsible for this story: James M. Gomez at

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