Serbia raises taxes to meet IMF demands

28/09/2012

Serbia is making efforts to meet IMF demands in order to secure a new precautionary loan.

By Biljana Pekusic and Bojana Milovanovic for Southeast European Times in Belgrade -- 28/09/12

The VAT on basic food will remain at 8 percent. [Reuters]

In a revised 2012 budget that was adoped by the Serbian parliament on Tuesday (September 25th), the country's tax revenue will increase to 7.2 billion euros, up 3.3 percent from the previous budget, while the deficit will drop to 1.7 billion euros, or 6.2 percent of the country's GDP.

Along with the budget approval, MPs also voted to increase the country's VAT to 20 percent, up from the previous 18 percent, which will go into effect on Monday.

The fiscal actions come a little over a week after a delegation from the IMF was in Belgrade to discuss opening a new loan plan for the country.

In February, the Fund suspended Serbia's $1.3-billion precautionary loan because the country was slipping on the required deficit and debt targets.

After this month's visit, the IMF said it welcomed Serbia's "intention to maintain the inflation-targeting regime needed for macro-economic stability," and called for "corrective measures" to bolster the central bank's autonomy.

"The budget contains appropriate measures to increase revenue and limit indexation of mandatory spending, but these savings are more than compensated by planned higher spending," Zuzana Murgasova, head of the IMF mission for Serbia, said after the visit.

"Large increases in public spending and high deficits with regard to the budget for 2012 will lead to an increase in the public debt ratio above 60 percent of GDP by the end of the year, " Murgasova said.

The IMF said the government's measures are insufficient to increase the stability of public finances, and gave a pessimistic assessment of financial trends in Serbia: the decline of GDP this year by 0.5 percent, rise of inflation, double-digit foreign trade deficit, the lack of trust of investors and the lowering of the country's credit rating.

Earlier this year, Prime Minister Ivica Dacic’s government inherited a budget gap of 7.1 percent of GDP and public debt of almost 55 percent of GDP. The IMF said “tangible consolidation is needed” to restore order to public finances.

The VAT hike, which the state has planned to help fill its coffers, has fuelled fear of general inflation, which could effect the already low standard of living.

However, some economists believe that the increase will not have a significant impact on inflation, and will only temporarily and insufficiently patch up the hole in the budget.

Miroslav Prokopijevic, an economist st the Institute for European Studies, said the government's measure of upping VAT is wrong.

"This measure will only temporarily give a slight boost to the budget, but will strangle the economy and only pose an even bigger problem in a few months' time," Prokopijevic told SETimes.

The 2 percent increase will draw money out of the economy, where it is being used productively, and poured into the state, which does not distribute it in the appropriate manner, he said.

Ivan Nikolic, of the Economics Institute, told SETimes that the VAT raise should not lead to high inflation.

"We can expect growing prices, but by no more than 1 or 1.5 percent," said Nikolic.

He also said the price hike would be mitigated by the fact that the tax rate for basic commodities will not increase, remaining at 8 percent.

"The prices of bread or milk should not be higher than they are now. That protects those with the lowest earnings," Nikolic said.

Some citizens are not happy.

"We already have a disastrous living standard, this will only additionally strain the household budget. Salaries and pensions can barely cover even the most basic needs and the prices keep on rising, I don't know how we can make ends meet," pensioner Stanko Brkic, 67, who lives on 200 euros a month, told SETimes.

This content was commissioned for SETimes.com.