Serb Recession Would Deepen If Dinar Is Fixed, Cupic Says

Serbia’s economic contraction may deepen and unemployment may soar should the central bank and government shift to a fixed-exchange rate from the dinar’s managed float, the head of Hypo Alpe Adria Bank AD said.

“Radical measures” such as the introduction of a currency-board system or an fixed-exchange rate for the dinar “imply a high cost,” said Vladimir Cupic, the head of the Serbian unit of Austria’s Hypo Alpe-Adria Bank International AG, said at a business forum in Kopaonik, Serbia, today.

Serbia has managed the dinar’s exchange rate to keep inflation under control since 2006, though some local economists and business leaders have urged the central bank to consider fixing the dinar to the euro instead.

“There is hardly a politician who would be ready for a 10 percent drop in gross domestic product and an increase in unemployment to 30 percent as a result,” Cupic said. “In a small, open and highly indebted economy, the exchange rate cannot be used as a tool for growth either.”

The government will ask the central bank to lower interest rates and manage the dinar’s exchange rate to bolster economic growth and aid exporters, Finance Minister Mladjan Dinkic said March 6.

According to Hypo’s research, the dinar’s nominal decline of 30 percent against the euro between late 2008 and the end of 2012 was equivalent to zero depreciation in real terms, with no impact on exports over the past four years.

“It’s the real depreciation that matters for trade,” Cupic said.

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