July 27 (Bloomberg) -- Serbia’s new government was sworn in today with the dinar at a record low and one in four Serbs out of work as the Balkan nation edges toward a financial crisis and an economic recession.
Premier Ivica Dacic, a wartime spokesman of deceased strongman Slobodan Milosevic, and his 19-member Cabinet took the oath of office in Belgrade. Lawmakers had debated into the early hours this morning with opposition parties warning the coalition mustn’t take Serbia back to the 1990s, when Dacic’s Socialists and President Tomislav Nikolic’s Progressives served under Slobodan Milosevic.
The four-party coalition, which was backed today by 142 members of the 250-strong Parliament, is drawing up a plan to stave off bankruptcy after the budget deficit widened to more than 7 percent of gross domestic product at the end of March.
“We have the highest cost of capital, the most unstable exchange rate and the lowest subsidies to agriculture,” Dacic told lawmakers during the debate. He said he would stabilize the currency, increase export incentives, curb the budget deficit by the end of September and set up a council for economic recovery.
The government comes to power after three months of political wrangling. The International Monetary Fund suspended a $1.3 billion precautionary-loan program in February amid evidence the previous administration was slipping on budget and debt targets as the economy lurched toward a recession and the euro region’s crisis pushed up borrowing costs.
“Serbia needs an IMF program if it wants to maintain its external liquidity,” Vladimir Gligorov, an economist at the Vienna Institute for International Economic Studies, said by phone July 23. “No Serbian government has faced up to the task of slashing public and private spending. If they don’t do that, the next thing you see is a Greek scenario. But Greece has the European Central Bank to help and Serbia doesn’t.”
Finance Minister Mladjan Dinkic said yesterday that he will meet the World Bank’s top official for the region at the start of next week, adding that he will also “immediately” invite the IMF for talks about Serbia’s public finances.
Dacic’s Socialists are back in power for the first time since the ousting of party founder Milosevic, who is blamed for fomenting the 1990s Balkan civil wars that destroyed the economy. He has already declared banks “public enemies,” a phrase Gligorov said “serves as preparation for financial repression.”
Dacic’s plan to sack the central bank governor, Dejan Soskic, if he does not cooperate with the government, prompted criticism the new Cabinet was destabilizing the dinar. Cedomir Jovanovic, leader of the opposition Liberal Democratic Party, warned the government it “must respect the independence of that institution.”
The planned central bank change has already raised eyebrows, Laza Kekic, Regional Director for Europe at the London-based Economist Intelligence Unit, said in e-mailed comments.
“It is too soon to make definitive judgments about the incoming government,” Kekic said. “Although there may already be some cause for concern there are also reasons to believe that the coalition’s bark will be worse than its bite.”
The biggest party in the coalition, the Progressives, will be closely watched “from Brussels” and given that Serbia’s economy and public finances are in “dire straits, the government’s room for maneuver is very limited,” Kekic said.
Since May, the dinar has lost 5.9 percent against the euro, the third-worst performance among 178 currencies tracked by Bloomberg worldwide.
The central bank sold 24.5 million euros ($30.1 million) yesterday to prop up the currency, helping it to erase intraday losses of as much as 0.9 percent. The currency traded at 118.0095 per euro at 1:03 p.m. in Belgrade, up 0.3 percent on the day.
Serbia’s public debt rose to 52.1 percent of gross domestic product in April. The IMF set a target of 4.25 percent of GDP for the budget gap this year and 45 percent for debt.
The new Cabinet is committed to fiscal consolidation, resuming talks with the IMF and the World Bank, and faster integration with the European Union, according to the text of their coalition agreement. Austerity measures to be adopted by September include tax and state-procurement overhauls, while public wages and pensions won’t be reduced.
Dacic said citizens won’t be expected to tighten their belts and it will be up to the government to “help the people survive the economic crisis as painlessly as possible.”
As the euro area slips toward a recession amid a flare-up of the debt crisis, Serbia is fighting to keep its economy from shrinking and service external debt that stood at 24.2 billion euros at the end of May. The country needs to borrow $2.2 billion in the second half of the year to finance its budget and repay debts to domestic and foreign creditors.
“The key challenges ahead of the government continue to be the medium- and long-term economic transformation of the Serbian economy and recovery in growth,” Agata Urbanska, an economist at the London-based HSBC Bank Plc, wrote in the July issue of HSBC’s Global Research for the third quarter. “In the short term, cooperation with the IMF and the EU will be key indicators of the policy direction of the new government.”
The debt crisis has staunched exports from Serbia, with the economy contracting 1.3 percent in the first quarter of 2012. It has also boosted the current-account gap to about 17 percent of GDP, while public debt exceeded 50 percent of economic output and unemployment hit 25.5 percent.
“It would be good to ask the IMF for a new stand-by arrangement” when the government completes a draft of the revised 2012 budget, to allow for policy adjustments before lawmakers adopt the new legislation, said Milojko Arsic, a member of central bank’s Council of the Governor and chief economist at the FREN economic research institute in Belgrade.
Serbia is suffering from external imbalances, a low investment rate, negative net savings, high unemployment and industrial output equivalent to a third of what it was 23 years ago, Miroslav Zdravkovic of the Belgrade-based Economics Institute wrote July 22 for the Makroekonomija website.
Using the real depreciation of the dinar as the “main monetary-policy tool,” along with unlimited foreign-exchange purchases and a low policy rate at the central bank would help reduce the imbalances, he said.
Serbia is already paying the price for ditching its IMF loan program earlier this year. The cost of borrowing has risen to 12.7 percent for the shortest three-month dinar-denominated debt, while yields on its benchmark 10-year Eurobond maturing in 2021, stand at 7.02 percent.
“Yields of 6 or 7 percent mean that creditors do not expect to be repaid in full,” Gligorov said. “An economy growing at zero percent can’t afford such high interest rates, which serve as insurance against future debt rescheduling or forgiveness. Illiquidity in the economy is widespread and that means there are expectations that some debts won’t be paid.”
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