IMF gives green light to 350m-euro loan for Serbia

18/03/2010

The IMF gave high marks to Serbia's recent economic performance, good enough for another standby loan. But Serbia needs to do more to overcome its crisis and fulfill requirements set by the Fund, IMF officials said.

By Georgi Mitev-Shantek for Southeast European Times in Belgrade – 18/03/10

Frozen pensions and unemployment remain the biggest challenge of Serbian government, according to the IMF mission. [Getty Images]

Serbia met all "key quantitative targets" and successfully completed a 2.9 billion-euro standby agreement with the IMF, said Albert Jaeger, head of the Fund's Serbian mission after a two week review of the deal. At the same time, the Fund stressed the need for significant progress in structural areas, such as the reform of the pension system.

"The programme is performing well ... with a considerable margin," Jaeger said. "Encouragingly, with the global economy stabilising and foreign banks remaining strongly committed to Serbia, the economy is starting to recover."

Serbia has not received this kind of evaluation from the IMF for the last ten years, Economy and Regional Development Minister Mladjan Dinkic said.

However, frozen public wages and pensions, the high rate of unemployment and a growing number of insolvencies remain "serious headwinds" facing the country, according to the IMF report.

The IMF plans to review the government's plan on new pension indexation, which, according to Deputy Prime Minister Jovan Krkobabic, will be effective by April 2011. The plan considers adjusting pension growth to public sector wage hikes.

The changes in how pensions are calcuated is now only a suggestion, said Jaeger, noting that the IMF remains sceptical about the proposal.

"It could be done only if both wages and pensions in next couple years rise in a manner that their percentage in GDP seriously falls," he said. "At this moment, there is no guarantee that next year, which is the start of an election period, public wages could be controlled."

The IMF also reminded the government about promises made during earlier reviews of the deal, such as cutting the public sector staff. According to official statistics, one third of 2 million employees in Serbia work in some level of government or state-owned companies. The government plans to lower this number by about 8,000 employees by April.

"We have agreed to a gradual cut in public spending, which should amount to 2% of GDP between the end of 2008 and the end of 2010," Finance Minister Diana Dragutinovic said.

The state administration layoffs will be one of several topics to be reviewed at the IMF delegation's next scheduled meeting in May.

Another challenge Serbia must overcome, according to IMF requirements, is strengthening its currency. The dinar has fallen against the euro and was recently rated at about 99.33 dinars per euro, according to Dragutinovic.

Serbia should ease dependence on external borrowing, boost domestic savings and attract foreign investments, according to the IMF. Serbia cannot afford a return to the pre-crisis model of growth based on high consumption and low domestic savings and low exports, Jaeger said.

"Serbia needs to 'shift a gear' and follow the example of successful Eastern European countries that managed to build competitive economies with tradable goods and high level of domestic savings," Jaeger said. "That is painful in the short term but prosperous long term."