Serbian Dinar’s Weakening May Spur Inflation, Institute Says

Serbia needs a new government that will enact tighter fiscal policies as the dinar’s depreciation, which has helped smooth external imbalances, will spur inflation, the FREN economic research institute said.

The dinar has weakened 9 percent against the euro this year, prompting the National Bank of Serbia to spend 1.2 billion euros ($1.5 billion) to slow its declines. Inconclusive May 6 elections have damped investor confidence and raised concern that a prolonged delay in forming a new government will delay bailout-loan talks.

“The imbalances between the high current-account deficit and weak capital inflows have been smoothed so far through the dinar depreciation and financed through dwindling foreign-exchange reserves,” said Milojko Arsic, FREN’s chief analyst and a member of the central bank’s supervisory board.

Serbia needs to form a government quickly to ease concern over its fiscal outlook as the economy teeters on the brink of recession, according to Fitch Ratings. The country’s three-member Fiscal Council, which monitors budget performance, warned of a looming debt crisis on May 30 after the budget gap rose to 7 percent to 8 percent of gross domestic product and public debt approached 50 percent of GDP.

Economic output contracted 1.3 percent in the first three months of 2012. The fiscal gap was above 7 percent of GDP and the current account deficit, a measure of money flowing into and out of a country, reached 17 percent of GDP, or double the Finance Ministry’s forecast for the year.

Serbia’s economy may stagnate this year at best if a new government adopts a credible savings plan and restores a program with the International Monetary Fund, Arsic told reporters in Belgrade. The inflation rate jumped to 3.9 percent in May from 2.7 percent in April.

The current-account deficit is making Serbia “vulnerable in case of low capital inflows” and restoring an IMF loan program, frozen in February after it became clear that Serbia would slip on agreed debt and deficit targets, would help convince investors to return to Serbia, he said, adding the imbalances may spark an “internal crisis” if not corrected.

Fear from “rising inflation, debts and unemployment seems to have engulfed the political elite” and they will be forced to adopt austerity measures, said Kori Udovicki, a former central bank governor and the founder of FREN.

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