The two-week IMF mission, led by Zuzana Murgasova, will hold discussions for two weeks starting May 8 on the 2013 Article IV consultation, which “represent a health check of Serbia’s economy,” Bogdan Lissovolik, the IMF resident representative in Serbia, said in e-mailed answers today. The IMF last held Article IV consultation for Serbia in 2010.
Meetings “may offer a useful opportunity to reflect on the reform agenda and discuss what may be needed for a potential program,” Lissovolik said.
The IMF suspended a $1.3 billion precautionary loan with Serbia in February 2012 on evidence the previous government was slipping on deficit and debt targets. It told Serbia in November to cut debt without choking economic growth, citing an unsustainable fiscal gap, volatile inflation and high unemployment.
Serbia had two months to agree on fiscal policy goals that would have paved the way for the start of talks on a new loan with the IMF. Prime Minister Ivica Dacic’s Cabinet, in office since last July, needs to curb budget spending to keep its fiscal deficit broadly within target. The IMF loan would have unlocked budget support loans from the World Bank and Russia, worth a combined $600 million.
Serbia aims for a fiscal gap of 3.6 percent of economic output in 2013. The Fiscal Council, appointed by parliament to oversee the government’s compliance with fiscal rules, sees the gap of at least 4.5 percent of gross domestic product. The budget deficit hit 50 billion dinars ($592 million) in the first three months of 2013, against a full-year target of 122 billion dinars.
“I expect great pressure on the fiscal side,” Nebojsa Savic, founder and economy professor at the Faculty for Economics, Finance and Administration, or FEFA, in Belgrade, said in a phone interview. Serbia needs the IMF for lower borrowing costs, greater foreign investment and as a proof the government is pursuing reforms, he said.
Junk-rated sovereigns, including Serbia and Hungary, have tapped foreign debt markets this year to take advantage of low borrowing costs as central banks from the U.S. to Japan buy bonds to boost liquidity. Serbia sold $3.25 billion in foreign-currency bonds since September, equivalent to 8 percent of GDP.
“The IMF may turn a blind eye to some slippage on the deficit target, but they will certainly not tolerate the trend established in the first quarter,” said Savic, who also chairs the central bank’s Council of the Governor. “If you don’t offer a credible plan to cut spending, the IMF may advise Serbia to raise taxes, but that’s not a solution either because higher taxes force companies into the shadow economy.”
The Finance Ministry in Belgrade declared “a formal end to recession” in its May 6 statement after the economy showed a “modest 1.9 percent expansion” in the first quarter when car output almost tripled and crude oil derivatives, chemicals, pharmaceuticals, tobacco, textile and furniture industries all posting “high growth rates.”
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