Bloomberg News

Serbian Cabinet Adopts Measures to Save 15.7 Billion Dinars

March 29, 2012

Serbia’s government adopted measures to save 15.7 billion dinars ($187 million) to bring the state budget deficit back toward its target for 2012 amid an economic slowdown, Deputy Finance Minister Dusan Nikezic said.

Most of the funds, or 10.9 billion dinars, will come from a cash transfer from local governments after a law last year gave municipalities powers to collect more taxes and fees. A further 4.8 billion dinars will be saved through streamlined discretionary spending, which includes business travel for government officials.

“These measures prove that the government is pursuing a responsible fiscal policy,” Nikezic said at a press conference today in Belgrade. The government voted “unanimously” for the measures aiming to achieve a “sustainable fiscal deficit.”

The Balkan nation of 7.2 million people can expect economic growth of between “zero and 0.5 percent,” down from a previous forecast for a 1.5 percent expansion. Negative trends have been seen in the number of jobs available and an increase in the number of actively unemployed persons by 1.8 percent, according to the paper adopted by the government.

Subsidies Remain

The Cabinet will keep subsidies in agriculture, industry and infrastructure and slash sovereign guarantees for borrowing by public enterprises to 125 million euros from 432.5 million euros and trim backing for project financing to 17.5 million euros from 115 million euros, he said.

The government will also leave in place guarantees for JAT Airways, aircraft maintenance company JAT Tehnika, pharmaceuticals maker Galenika and a housing property as the government converts former military barracks into civilian accomodations.

Prime Minister Mirko Cvetkovic’s Cabinet announced measures before general elections on May 6, adjusting the budget after a 20 percent revenue decline in February, when extreme weather conditions and heavy snowfall kept dozens of factories, most schools and many public institutions out of work for days.

The measures signal the government wants to make a “systemic change” and include in the budget all “sorts of fiscal forms that normally do not end up in the budget, environmental taxes for instance,” said Milojko Arsic, an economics professor and chief macroeconomist at the Belgrade- based FREN Foundation for Economic Science Development.

IMF Pledge

Bringing the deficit back to 2012 budget targets was the main pledge Cvetkovic made to the International Monetary Fund, after agreeing to keep a $1.3 billion loan program frozen until a new government is sworn in.

The IMF decided to freeze the program after it turned out the 2012 budget gap would reach 5.25 percent rather than 4.25 percent of economic output. At the time, the IMF also saw the level of originally planned sovereign guarantees as excessive.

Nikezic couldn’t tell how soon the government will manage to bring the fiscal deficit down. The government reported a two- month budget gap of 41.3 billion dinars at the end of February, already exceeding the three-month deficit target of 26 billion dinars agreed with the IMF.

Serbia aims for a full-year consolidated budget deficit of 152 billion dinars and the IMF would like to see the first-half gap at 61 billion dinars at the end of June.

“Lots of budget revenue will arrive on the last day of March and our goal is to keep the deficit at the levels agreed with the IMF,” Nikezic said, adding that the government already reduced “discretionary spending” in March.

Tim Ash of the Royal Bank of Scotland said the decision was “important and potentially positive, as the issue of state guarantees had been a sticking point for the IMF - one reason the country failed to complete the first review under the precautionary stand-by arrangement.”

It’s “brave of the government to make these changes or reforms before parliamentary elections” and also “shows commitment to reform,” he said in a note to clients today.

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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