Serbia to Seek IMF Approval for Public Wage, Pension Increases

Serbia will ask the International Monetary Fund in August to let it reverse cuts by raising public wages and pensions after the budget deficit narrowed more than planned and its recession deepened.

Prime Minister Aleksandar Vucic also expects the Washington-based lender to improve its 2015 economic outlook for Serbia in the coming days to zero growth from a prediction of a 0.5 percent contraction. The IMF, which is visiting the Balkan state to review its three-year stand-by accord, will then raise it again by another half point in August, Vucic predicted.

“We will start talks with the IMF in August on raising public wages and pensions, and we will raise public wages and pensions,” Vucic said in Belgrade. “We will have positive growth in spite of fiscal consolidation measures and that is almost a miracle.”

Vucic wants to soften the terms of the IMF agreement signed in February, in which he committed to bringing the budget deficit to below 4 percent of economic output by 2017, partially through the wage and pension cuts. His government stopped short on pledges to raise electricity prices, sell or close about 500 companies that suck $1 billion from the budget in subsidies each year and restructure the biggest utilities. The policies have triggered rallies against the measures by pensioners and employees of state companies.

Under the IMF agreement signed in February, Vucic pledged to bring the budget deficit to below 4 percent of economic output by 2017. His administration has cut public wages and pension and committed raised electricity prices. Vucic also needs to sell or close about 500 companies that suck $1 billion from the budget in subsidies each year and restructure the biggest utilities. The policies have triggered rallies against the measures by pensioners and employees of state companies.

Seeking Softening

The expected January-April budget deficit will be around 70 percent below the level agreed with the IMF, with savings amounting to 420 million euros ($471 million), Vucic said.

At the same time, the economy contracted 1.9 percent in the first quarter, compounding a 1.8 percent drop the previous three months. Industrial output also declined and the trade deficit widened, the Statistics Office said on Thursday. Foreign direct investment contracted 16.4 percent the first two months of the year.

With the economy reeling, Vucic’s government has said it may ask the IMF for more time to overhaul the unprofitable state companies. It also wants to raise electricity tariffs less than agreed, in addition to a green light to roll back pension and wage curbs.

But raising wages and pensions isn’t appropriate, the Fiscal Council, a parliament-appointed body that monitors fiscal compliance, said in monthly report. Budget savings show the government isn’t spending the planned amount on capital investment and it has delayed redundancy payments to workers who are losing job as unprofitable companies close down, the Council said.

“This will be difficult sell to the IMF so early in the program,” Tim Ash, chief economist for emerging markets at Standard Bank Group Ltd. in London, said by e-mail. “The IMF will want to see more durable compliance with the program before agreeing to softening.”

The dinar traded almost unchanged at 120.11 per euro at 2:31 p.m. in Belgrade, according to data compiled by Bloomberg. Yields on dollar bonds maturing in 2021 rose 4 basis points to 4.527 percent, the highest since April 6.

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