SETimes.comIMF agreement forces Serbia to save
19/11/2008
Serbia has long spent more than it earns, relying on foreign investments to bridge the gap. But the global financial downturn has made that strategy unsustainable.
By Igor Jovanovic for Southeast European Times in Belgrade -- 19/11/08
After nearly two weeks of negotiations, the Serbian government and the IMF have finally agreed on a new arrangement. The deal reached on Friday (November 14th) envisions massive cuts in public spending in order to avoid dramatic consequences of the global economic slump.
Talks had earlier stumbled over the IMF's demand that the government suspend the 10% pension raise that it approved in October. According to the Fund, Serbia's state budget does not cover the expense.
However, the Party of United Pensioners of Serbia -- a member of the ruling coalition -- threatened to bring down the government if pensioners lost the promised raise. In the end, under a compromise, retirees will still see larger pensions, but the government must cap the increase at 8%.
Under Friday's arrangement, which expires in March 2010, Serbia is eligible to receive 412m euros from the IMF to maintain the exchange rate of the dinar or to fulfill international financial obligations. According to Serbian officials, the country's banking system is solvent and the foreign currency reserves are sufficient, so it does not plan to use the IMF loan, as Hungary, Ukraine and Iceland have done.
"The programme with the IMF is a measure of prevention and is the state's response to the global financial crisis," Finance Minister Diana Dragutinovic said, stressing Serbia would take loans from the IMF "only if it needs financial support".
Serbian economists say their country needs the arrangement because it has been spending more than it earns for years. Foreign investments so far have covered the deficit, but experts fear these will be conspicuously lower because of the current global economic crisis. The loan also could help convince investors of the Serbian economy's stability.
IMF Mission Chief Albert Jaeger said the Fund is not worried about the impact of the global financial crisis on Serbia over the short term. However, "in the long term, Serbia is one of the more vulnerable countries, because it has so far annually spent about 5 billion euros more than it earned, as well as due to the weak export base and small savings," he said.
GDP growth stands to suffer. Instead of reaching the projected 7%, experts say it may reach only about 3% in 2009.
Analysts pinpoint the large foreign trade deficit -- 6.16 billion euros in 2008 -- as the biggest problem for the Serbian economy, along with major dependency on new foreign investments.