Serbia’s central bank urged the government to lower the budget deficit and limit public debt to avoid further weakening of the dinar.
Fiscal consolidation would give the Belgrade-based Narodna Banka Srbije room to reduce interest rates and spur post-crisis economic recovery in a year when growth is expected at 0.5 percent at best, central bank Vice Governor Bojan Markovic said in an article posted today.
“Relying on a fiscal expansion at this stage of the crisis is risky,” Markovic said in the article published a week before the nation casts ballot to elect new president, parliament and local governments. The central bank has spent 678.5 million euros ($899 million) to prop up the dinar since February. The dinar, the world’s second worst-performing currency in the last 12 months, traded at 111.9107 to the euro at 3:39 p.m. in Belgrade, or 10 percent weaker than a year ago.
Prime Minister Mirko Cvetkovic’s cabinet, seeking re-election, reported a budget gap of 41.3 billion dinar after the first two months of the year. The National Bank of Serbia left its benchmark interest rate unchanged for a third month in April as the dinar slumped, triggered by a freeze in a $1.3 billion precautionary loan deal with the International Monetary Fund in February and followed by capital outflows.
The new government emerging from May 6 elections will need to raise the value added tax to curb consumption, cut personal taxes and boost investments in export-oriented manufacturing industries to bolster economic growth over the medium term, Markovic said.
“In the short run, fiscal consolidation can cause a decline in demand, but its benefits on economic activity and growth over the medium term are numerous,” he said.
“The more those mechanisms are efficient and used, the smaller the need to adjust through the dinar’s depreciation,” he said.
Serbia needs to reduce the 2012 fiscal gap to below 4.5 percent of economic output and keep a lid on public debt of 45 percent of GDP, in line with its own fiscal rules. Such measures leave no room for fiscal incentives, which Serbia used in its early response to the crisis triggered by the collapse of Lehman Brothers Holdings Inc. in 2008.