Serbia Adopts New Budget, Cuts Gap in Half to 3.6% of GDP

Serbia approved a budget for next year designed to trim the fiscal deficit more than assessments by the nation’s independent Fiscal Council and the International Monetary Fund.

Lawmakers voted 138 to 69 in favor of the plan to cut the budget gap almost in half to 3.6 percent of gross domestic product, or 121.9 billion dinars ($1.4 billion). The three-member Belgrade-based Fiscal Council, appointed by Parliament, predicted the shortfall would be about 25 billion dinars higher, or 4.3 percent. The 2012 deficit is estimated at 6.7 percent.

“This is only the beginning of our fight against the economic crisis,” Finance Minister Mladjan Dinkic said before the vote.

Prime Minister Ivica Dacic’s Cabinet, in office since July 27, has pledged to bring down the widest deficit since the 2000 ouster of former Serbian strongman Slobodan Milosevic. Serbia completed the first round of talks with the IMF, which will probably return to Belgrade early next year for more negotiations on a new loan when it sees the completed budget package.

The government plans to spend about $12.5 billion and collect revenue worth $11 billion next year, slash state aid to unprofitable public companies and set aside 300 million euros ($390 million) in a reserve financial stability fund to bolster the banking industry if needed, according to Dinkic’s plan.

Debt Servicing

The government will need 493.6 billion dinars next year to service all its debt, 25 percent more than in 2012. It will rely on dinar- and euro-denominated debt sales at home and dollar-denominated Eurobonds abroad until an upgrade in Serbia’s BB-credit rating at Standard & Poor’s and Fitch Ratings. It may also add seven-year and 10-year dinar bonds to existing maturities.

The growth forecasts of the new government, dominated by Milosevic’s Socialists and former nationalists, may be hurt by signs that Germany, Europe’s biggest economy and Serbia’s top trading partner, may be tipped into a recession because of the sovereign-debt crisis in the euro area.

The Fiscal Council sees Serbian 2013 growth of 1.4 percent, based on a modest recovery in farming output. It may reach 2 percent if the government sells its steelworks and a new owner restarts production.

Inflation Target

Inflation will be 1.5 percentage points above the target for 2013, or about 7 percent, the council said. The central bank targets inflation at 4 percent, plus or minus 1.5 percentage points through 2014. The government sees consumer-price growth easing to 5.5 percent in 2013 from 13.8 percent at the end of this year.

The government and the central bank target a stable exchange rate for the dinar, based on a narrower fiscal gap, stabilized food prices, a lower risk premium, increased capital inflows and improved global economic prospects.

Each percentage point of weakening in the dinar raises public debt by 0.45 percentage point of GDP. Public debt is expected to peak at 65.2 percent of GDP next year, falling to 58.4 percent in 2015, still above the legal cap of 45 percent.

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