Bloomberg News

Serbia May Form Government as Interest Rate Rise Looms

June 06, 2012

Serbian parties are set to agree on the formation of the new Cabinet in the coming days as the sliding dinar may force the central bank to increase its benchmark interest rate.

The Balkan country’s central bank will probably increase its two-week repurchase rate at its meeting on June 7, according to a Bloomberg survey of 22 economists. Boris Tadic, former president and the leader of the Democratic Party, held talks with the President Tomislav Nikolic in the capital Belgrade today after no group gained a sufficient majority in the parliamentary vote last month.

“We believe we can secure a parliamentary majority in a few days” that would back the new Cabinet, said Tadic who aims to become the next Prime Minister. “The main questions in all the talks with all the parties is Serbia’s economic future and the challenges we face in the domain of fiscal and macroeconomic policies.”

Serbia needs to quickly form the government to ease concern over its fiscal outlook as the economy titters on the brink of recession, according to Fitch Ratings. Narodna Banka Srbije is striving to arrest the dinar’s slide, which weakened against the euro about 11 percent this year.

Today, the currency rose to 115.47 level per euro at 1:26 p.m. Belgrade after dropping to 117.41 on May 31, according to data compiled by Bloomberg.

The dinar may plunge to 125 per euro by the end of the year and inflation may accelerate to 10 percent if a new government is not in place soon to implement fiscal consolidation, the Belgrade-based Economics Institute said yesterday.

The new government will also need to secure a new deal with the International Monetary Fund, which was frozen in February after Serbia slipped on its deficit reduction target. The $1.3 billion arrangement was agreed with the previous government last year.

Parties need to form a coalition that would command at least a 126-seat majority in the 250-member parliament.

To contact the reporters on this story: Boris Cerni in Ljubljana at bcerni@bloomberg.net; Misha Savic in Belgrade at msavic2@bloomberg.net

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


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