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Serbian Dinar Weakens After Central Banker Soskic Resigns

Serb central bank Governor Dejan Soskic’s resignation over plans to clip the bank’s autonomy pushed the dinar to a record low on concern the nation’s drive to join the European Union and win a bailout will falter.

The plan to limit the independence of the National Bank of Serbia’s management is supported by the finance committee and more than 100 deputies in the 250-seat legislature. The dinar, Europe’s worst-performing currency this year, dropped as much as 0.9 percent against the euro and traded at 118.818 at 10:53 a.m. in Belgrade.

Serbia, which won EU candidacy status this year, has been ruled since July 27 by a coalition led by former colleagues of Slobodan Milosevic, who took the country into isolation during the Balkan wars of the 1990s. The International Monetary Fund, which suspended a $1.3 billion bailout loan in February, warned against clamping down on central bank powers by a government that wants to pull Serbia out of recession with higher spending and lower interest rates.

The European Commission is “concerned by what we see at present,” said Peter Stano, the spokesman for EU Enlargement Commissioner Stefan Fule, in a statement today from Brussels. “The Commission expects from Serbia, as a candidate country, to progressively align with the EU on economic and monetary policy. The adoption of these amendments would be a considerable step back.”

Recession Concern

Serbia is struggling to avoid a second recession in three years, after the economy contracted 0.6 percent in the second quarter, following a 1.3 percent decline in activity in the first three-month period of 2012.

Prime Minister Ivica Dacic, a former Milosevic spokesman, has argued economic policy can’t be efficient if the central bank and the government pursue different goals and warned the bank not to contravene state efforts to spark growth.

Dacic wants to halt a further increase in unemployment, already at 25.5 percent, while curbing any further expansion in the fiscal deficit, which reached 7.3 percent of economic output at the end of March.

The bill would establish a supervisory body to take an “active role” in monetary decision-making and have the power to “prevent any banks from abusive international-payment operations” and “money laundering” activities, according to the draft. It also calls for the central bank governor and vice governors to step down. Debate on the law will continue tomorrow, Parliament’s press office said late last night.

‘Political Risk’

The “fallout over the central bank law and the increasingly uncertain prospects of IMF financing” are adding to political risk, Eldar Vakhitov and Andreas Kolbe, emerging-market economists at Barclays Capital in London, said in a note to clients yesterday.

The IMF, which suspended a $1.3 billion loan in February because of increased government spending, said in a letter to Soskic yesterday that the legislation appears to be “rushed.”

“Approval of these amendments would create uncertainty, undermine policy credibility, and prompt questions about the proper conduct of macroeconomic policies,” it said in the letter. “These amendments require careful and detailed consideration, given the potentially considerable implications for overall macroeconomic stability in Serbia, and for the Fund program.”

World Bank

The World Bank joined the IMF in questioning Dacic’s policies, saying the amendments “fall short of international best practices and may undermine considerably” the central bank’s credibility.

The 45-year-old Soskic, who was appointed to a six-year term in July 2010, had often warned that Serbia’s finances were deteriorating and fiscal consolidation was urgently needed.

“This is a very negative first result for the new government and there’s very little in terms of offsetting news like details of necessary budget adjustments or future cooperation with the IMF,” said Agata Urbanska, an economist at HSBC in London. “Investors are also left in the dark about the drive for change at the central bank.”

Finance Minister Mladjan Dinkic told reporters yesterday that he has been in “daily contact” with the IMF and the EU, trying to convince them that the planned change is “correct.”

‘Ugly Past’

The Progressive Party dropped its initial proposal to force the central bank to finance the state through purchases of government-issued bills and bonds on the secondary market, said Jorgovanka Tabakovic, a top Progressive official who is expected to be the next central bank governor.

“There is no need to create fear by a return to the ugly past,” she told the finance committee yesterday.

Tabakovic and Nikolic were members of the Serbian Radical Party between 1991 and 2008, which ruled together with Milosevic’s Socialists and led the country through bouts of hyper-inflation and currency devaluation.

Socialist Party spokesman Branko Ruzic defended changes as a way to reinstill confidence in the economy and the banking industry, which is dominated by foreign lenders.

There is “popular concern about banks dictating the changes in the exchange rate from the early morning hours every day,” said Ruzic. “Later, after the central bank intervenes, they earn on exchange-rate differentials.”

The dinar has fallen more than 10 percent against the euro, even after the central bank spent more than 1.3 billion euros ($1.6 billion) to curb the decline.

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