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Serbia to Tame Inflation as Slump Deepens: Central Bank

Serbia’s central bank will focus on taming inflation to help pull the economy out of a recession that will be deeper than previously estimated this year.

The economic contraction is now projected at 2 percent, compared with a previously forecast 0.5 percent, the Narodna Banka Srbije said in a quarterly report published today in Belgrade. It kept its estimate for 2013 growth at 2.5 percent.

The bank’s Nov. 8 increase of its benchmark interest rate by 0.2 percentage points to 10.95 percent was motivated by the need to contain inflation. “Measures in the coming period will also be motivated by bringing inflation to within the target,” the bank said in the report.

This year’s economic decline is mostly due to a 20 percent drop in agricultural output, the bank said. That pushed up food prices and the inflation rate, at 12.9 percent in October, which will peak in March next year. End-year inflation is seen at “just below 14 percent” said Snezana Vilaret, the bank’s head of economic research.

“The biggest inflationary wave is behind us,” the bank said. “We expect a fall in the inflation rate as of the second quarter of 2013” and its return to the target range of 4 percent, plus or minus 1.5 percent, by the end of the year.

IMF Talks

An International Monetary Fund mission is wrapping up talks with Serbian officials this week about the country’s deficit- cutting measures, and may return by February for a new program with the Balkan nation. The Washington-based lender suspended a $1.3 billion loan arrangement in February when the government failed to adhere to fiscal targets.

“There’s quite a realistic possibility for a new program with the IMF,” central bank chief Jorgovanka Tabakovic said. Outcome of the talks will depend on government’s assurances to the IMF about its fiscal consolidation plan, she said.

The state aims to narrow the budget gap to 3.6 percent of gross domestic product in 2013, from about 6.7 percent this year, and to balance the budget by 2016.

“Securing mid-term price and financial stability” is “the best way to help the economy,” as it also “helps reduce country risk and cost of borrowing,” the bank said.

Serbia sold $750 million of bonds last week, its second overseas bond offering this year, to cover part of government spending for 2013. The five-year notes were sold to yield 5.45 percent, with a 5.25 percent coupon.

The gross rate of non-performing loans in Serbia’s banking industry rose 0.2 percentage points in the third quarter to 19.9 percent, while capital adequacy ratio was at 16.4 percent, according to the report.

The central bank sees foreign direct investments at 1.2 billion euros next year, after a 200 million euro net inflow in 2012, Tabakovic said.

To contact the reporters on this story: Misha Savic 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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