Bloomberg News

Serbia Needs Dinar to Fall More to Offset Drop in Exports

December 20, 2012

Serbia should allow the dinar to weaken more to avoid a balance of payment crisis and counter a drop in export demand as the European Union, its main market, faces continued recession, a U.S.-sponsored foundation said.

The dinar has gained 4.25 percent since July 27, when Prime Minister Ivica Dacic’s Cabinet took office, the second-best performance in the world over the past five months after the Uruguayan peso, according to data compiled by Bloomberg. The dinar has lost 5.56 percent against the euro since January.

Months of appreciation against the euro “do not bode well for the economy because of deteriorating competitiveness,” said Milojko Arsic, the chief researcher at the Foundation for the Advancement of Economics in Belgrade today. “A strong dinar is bad for the economy and bad for new jobs” while a “gradual real dinar depreciation would offset declining export demand.”

Serbia has traditionally relied on borrowing and foreign investments to repay debts and close shortfalls. The country will need between 5 billion euros ($6.62 billion) and 6 billion euros a year over the coming years to repay creditors and needs to adjust spending to the economy’s size to avoid a “debt crisis,” said Arsic, a former central bank vice governor.

Arsic called on the central bank to refrain from further monetary-policy tightening as such restrictiveness “would be unwelcome because of excessive dinar appreciation.”

The Narodna Banka Srbije raised its benchmark interest rate six times since June by a total of 1.75 percentage points to 11.25 percent as it tries to bring inflation down to a target band of 2.5 percent and 5.5 percent by the end of 2013.

Arsic said external debt of 25.6 billion euros, or 83.7 percent, of its economic output in October is “worrying” because it rose from 77.5 percent of GDP in 2011.

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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