Government policies to save Serbia's economy

29/08/2012

Serbia's government has announced the first set of measures to address the state’s poor economy.

By Igor Jovanovic for Southeast European Times in Belgrade -- 29/08/12

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Serbian consumers have been hit by the economic situation, with stagnant salaries and decreasing purchasing power. [Reuters]

Serbia has faced difficult financial problems, but only since the new government released the economic parameters has the public been aware of just how bad the situation is, including the threat of bankruptcy, analysts said.

Foreign debt has grown to more than 15 billion euros, 55 percent of GDP, breaching the legal limit of 45 percent of GDP. The dinar has lost more than 13 percent of its value against the euro.

The IMF lowered its earlier estimate of 1.5 percent growth this year to a mere 0.5 percent. Further complicating matters, international credit rating agencies Fitch and Standard and Poor's last week lowered Serbia's credit rating to BB-.

"The new government has inherited a horrible situation, both in the economy and the financial system -- general insolvency, where practically no one pays anyone anything on time and large unpaid obligations, all of which is literally undermining and suffocating the entire economy," Ljubomir Madzar, professor at Belgrade's Faculty of Economics, said.

"The government should be given some time, if not 100 then at least 50 days to show how it will function," Madzar said.

On Friday (August 24th), the government announced the first set of measures aimed at saving the economy -- 1 billion euros in subsidised loans for exporters, the reduction of administrative salaries and amending tax laws.

"If the control of the expenditure ... continues, and the announced measures to bring in more tax revenue are introduced in September, Serbia's rating can be expected to improve by year's end," Miroslav Zdravkovic, an analyst at the Economics Institute in Belgrade, told SETimes.

But others are not so optimistic.

Miroslav Prokopijevic, of the Institute for European Studies, said that in addition to the announced tax hike, the government must also reduce public sector salaries, which are 20 percent higher on average.

"Salaries can be cut by 20 percent and 20 percent of public sector could be laid off in the next 18 months," Prokopijevic told SETimes.

Faced with decreasing purchasing power and increasing taxes, citizens said they find themselves in the worst position.

"We work longer hours, fearing our boss will fire us, and earn salaries that have not increased in years while we can buy less and less," Milos Gradic, a salesman from Belgrade, told SETimes. "If this situation continues, it will not be good, and as far as I can tell, the outlook is grim for next year as well."

The EU and The World Bank have said the amendments to the Law on the National Bank of Serbia can jeopardise the central bank's independence. An IMF mission to Serbia is planned for in mid-September to assess the latest macro-economic outlook, according to IMF resident representative in Serbia Bogdan Lissovolik.

"The mission will also talk about the IMF's concern over recent amendments to the Law on the National Bank of Serbia, which have disrupted its autonomy, as well as about the fiscal situation," Lissovolik said.

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The current IMF arrangement, from September 2011, is worth 1.1 billion euros, but was frozen in early February because the previous government had planned a deficit larger than the one agreed on.

Serbia can use the arrangement only if it cannot service its debt.

"Serbia is already at the beginning of a bankruptcy because it is unable to service its debts at home and in international financial markets," Vldimir Gligorov, researcher at the Vienna Institute for International Economic Studies, said.

But it does not need to end in bankruptcy, Gligorov explained; the outcome depends on the new government's policies.

This content was commissioned for SETimes.com.
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