IMF Urges Serbia to Cut Spending as Deficit Exceeds Targets
The Serbian government needs to exercise more fiscal restraint this year after last year’s budget deficit and public debts exceeded agreed targets, the International Monetary Fund said.
The Balkan nation overshot its fiscal deficit target by 0.3 percentage points of gross domestic product in 2011, ending the year with the gap of 4.8 percent of GDP, or 158 billion dinars ($1.89 billion), the IMF said in a report posted on its website yesterday. Public debt rose to 47.9 percent of GDP, exceeding the legal cap of 45 percent, it said.
The lender froze its $1.3 billion precautionary loan program with Serbia last month after discovering that the nation’s 2012 budget deficit would reach 5.25 percent of GDP and public debt would top 50 percent of GDP, the IMF said. Serbia has not yet released its end-2011 budget report.
Heavily reliant on the domestic market for borrowing, Serbia needs to maintain fiscal discipline and reduce fiscal financing risks by sticking with nominal fiscal gap targets of 26 billion dinars at the end of March and 61 billion dinars through June, the IMF said. The targets reflect lower revenue resulting from weaker economic growth.
The IMF forecast this year’s budget gap to exceed the target of 4.25 percent of GDP by “at least 1 percent of GDP,” the report said. Serbia can resume the program after elections in May, and after the new government takes “legal action that eliminates the scope for additional spending and debt issuance,” which amount to almost 2 percent of GDP eroding the “main pillar” of the standby loan arrangement, the lender said.
European ‘Growth Slump’
The government should also consider tax reform and raising value-added taxes to bolster revenue, the IMF said. Prime Minister Mirko Cvetkovic’s cabinet plans no tax increases before the elections.
Serbia’s economic recovery has “paused since mid-2011” and the unemployment rate, which surged above 24 percent, is a key concern, the IMF said. The economy is expected to grow 0.5 percent this year, the IMF said.
Challenges for policy makers include “a growth slump” in key trading partners and bank deleveraging as their parent institutions need to meet regulatory capital requirements. Gross external and public financing needs are estimated at 8.66 billion euros ($11.25 billion) in 2012, the IMF said.
Official foreign-exchange reserves were reported at 11.6 billion euros for January, while net reserves, excluding the funds commercial lenders keep with the central bank and funds from the IMF stood at 6.7 billion euros.
The central bank and the government also need to deal with bad debts because non-performing loans at 19.2 percent of the total credit portfolio were among the highest in the region and “immobilizing” resources banks could otherwise use for new lending, the IMF said.
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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