March 21 (Bloomberg) -- Serbia’s central bank should start cutting the benchmark interest rate and allow the dinar to weaken gradually to avoid a riskier plunge if capital flows dry up, a Belgrade economics foundation said.
Slowing inflation, reluctance to lower rates, a wide current-account deficit and stagnant or declining industries point to the need for a weaker national currency, the Foundation for Advancement of Economics, or FREN, said in a report in Belgrade today.
“A gradual dinar depreciation as a result of less restrictive monetary policy would be aimed at preventing a drastic dinar depreciation in the case of declining foreign capital inflows,” FREN Chief Economist Milojko Arsic said.
Prime Minister Ivica Dacic’s eight-month old Cabinet, dominated by former nationalists and Socialists once led by late Serbian strongman Slobodan Milosevic, is struggling to balance the economy.
Authorities are trying to keep the dinar stable, bring inflation down to no higher than 5.5 percent from 12.2 percent at the end of 2012 and narrow this year’s fiscal gap to 3.6 percent of gross domestic product from 6.7 percent last year.
The dinar has strengthened 3.2 percent against the euro during the past six months, the top gainer in Europe, according to data compiled by Bloomberg. The period covers Serbian borrowing of $3.25 billion in three Eurobond sales to finance the budget gap and service maturing debts.
The three Eurobonds improved Serbia’s balance of payments, pushing the capital account into a surplus, though that “is not sustainable,” said Arsic, a former central bank vice governor and a member of the Council of the Governor.
Expected private capital inflows won’t exceed 1 billion euros ($1.3 billion) this year, he said.
Government borrowing will push the public debt-to-GDP ratio to 62 percent or 63 percent this year, he said.
The external debt, approaching 90 percent of GDP, threatens “a balance of payments crisis,” which a weaker dinar would help avoid, he said.
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