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Serb Central Bank Calls for Austerity as It Defends Dinar

June 10 (Bloomberg) -- Serbia’s central bank, which sold euros today to prop up the slumping dinar, urged the government to adopt an austerity program quickly to narrow the budget gap and regain the confidence of investors.

Cost savings are “essential” after the International Monetary Fund warned last month the Balkan nation’s deficit will account for 8 percent of gross domestic product this year unless it implements measures, central bank Governor Jorgovanka Tabakovic told reporters in Belgrade. The bank sold 10 million euros ($13.2 million) today to slow dinar drop, intervening for eighth consecutive session, she said.

The state should target “subsidies that have been around for too long without visible effect” and avoid cuts in public wages and pensions that would affect trade, Tabakovic said. “The government must be ready to undertake difficult measures,” including an end to state financing of unprofitable public companies, she said.

Serbia aims to cut spending by about $1.3 billion to bring this year’s shortfall to 4.6 percent of GDP, Finance and Economy Minister Mladjan Dinkic said on June 7, after Standard & Poor’s said the country may face a downgrade without spending cuts.

Signals about a potential downgrade made some investors exit Serbian securities and “it’s very easy to affect the dinar because the market is shallow,” said Tabakovic, who is a member of the ruling Serbian Progressive Party.

The dinar traded at 114.69 per euro at 4:03 p.m. in Belgrade after falling to 114.74, according to data compiled by Bloomberg.

To contact the reporter on this story: Misha Savic in Belgrade at msavic2@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg

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