IMF to Watch Serbia’s Progress Before Agreeing Loan Program

The International Monetary Fund said it will watch how Serbia manages its public finances and central bank autonomy before agreeing to a new loan program.

The IMF “will assess the authorities’ request in the context of their policy plans and their implementation in the period ahead,” the Washington-based lender said after its mission completed a fact-finding visit. The IMF visit is the first to Serbia since Ivica Dacic became Prime Minister in July.

Serbia is eager to strike a deal because it may encourage investors to offer cheaper funds to the indebted state. Serbia’s parliament is due to adopt the 2013 budget next month.

The IMF, which suspended a $1.3 billion precautionary loan in February on evidence Serbia was slipping on agreed deficit and debt targets, welcomed Serbia’s “intention to maintain the inflation-targeting regime needed for macroeconomic stability” and called for “corrective measures” to bolster the central bank’s autonomy.

The economy will shrink about “half a percent” this year, while a recovery next year will only be modest, with downside risks, the IMF said in Belgrade today. The outlook is “clouded” by weak economic conditions and sizable domestic and external imbalances amid “deteriorating investor confidence and rating downgrades,” it said in an e-mailed statement today.

Dacic’s government inherited a budget gap of 7.1 percent of gross domestic product and public debt of almost 55 percent of GDP. The IMF said “tangible consolidation is needed” to restore order to public finances. Serbia’s public debt will increase to more than 60 percent of GDP by the end of 2012 because of “large public spending increases” and the country needs policies to “credibly restore fiscal and external viability and boost growth,” the IMF said.

The government has prepared a supplementary 2012 budget, to be presented to parliament later this month, that aims to narrow the deficit to 6.7 percent of GDP this year and 4 percent of GDP in 2013. The Fiscal Council urged the government on Sept. 13 to make efforts to reduce the gap to 6.5 percent of GDP. The original 2012 deficit target was 4.25 percent of GDP.

“The mission recommends additional spending restraint to be considered before the 2012 supplementary budget is enacted,” the IMF said. “For 2013, the government’s deficit target is broadly appropriate, but achieving it will require significant additional measures,”

The government should aim to bring public debt below 45 percent of GDP over the medium-term to “unlock” growth potential, 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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