Serbia, IMF to Resume Talks in Spring as Economy Teeters

Serbia and the International Monetary Fund will resume talks on a possible loan next spring as the Washington-based lender called for measures to cut government debt without choking economic growth.

Serbia’s fiscal deficit is “unsustainably large,” public debt has “increased significantly,” inflation is “volatile” and unemployment “elevated,” the IMF said in an e-mailed statement today after wrapping up a week-long mission to Belgrade. The economy will contract 2 percent this year amid a difficult global environment and with a modest recovery expected next year, said the Washington-based lender said.

Fiscal consolidation is “an urgent priority” as Serbia faces “numerous challenges” and “addressing the economic challenges requires appropriately balancing fiscal consolidation and growth objectives,” it said in the statement.

Prime Minister Ivica Dacic’s Cabinet has drafted a 2013 budget targeting a fiscal deficit of 3.6 percent of economic output, down from 6.7 percent at the end of this year. The target is “overly ambitious” and “there remains scope for improving the quality of the 2013 budget,” the IMF said. Serbia will need years of sustained fiscal consolidation to reduce its public debt to below a legal cap of 45 percent of gross domestic product through more spending cuts.

Fixing Finances

Recent measures toward fixing public finances, including an increase in the sales tax and steps to streamline public spending, “may not translate into the full needed adjustment” in 2013, the IMF said.

“The IMF said that cutting the budget deficit next year by 2 percentage points of GDP would be realistic,” Finance Minister Mladjan Dinkic told reporters in Belgrade. “We agreed on most issues, which gives us reason for optimism. And those we didn’t agree on are not reasons for pessimism.”

Serbia needs the IMF “for credibility and the market is already appreciating our efforts toward fiscal consolidation,” Dinkic said. The country doesn’t need IMF cash “either for the budget or for foreign-currency reserves” after last week’s Eurobond sale, he said.

Serbia will be looking for a three-year precautionary loan program, Dinkic said.