Serbia Won’t Cut Wages to Meet IMF Agreement Terms, Dinkic Says

Serbia won’t cut wages and pensions by ten percent to meet an International Monetary Fund requirement to renew a loan agreement, Finance Minister Mladjan Dinkic said.

The Washington-based lender, which stopped short of discussing a new accord in May on evidence that Serbia slipped on agreed fiscal targets, is “currently too tough and insufficiently appreciates what we are going to do,” Dinkic said at a conference in Belgrade today.

“In order to achieve an additional deficit reduction, the IMF believes public wages and pensions need to be cut by 10 percent,” Dinkic said today. “Our government is not prepared to accept that.”

Lawmakers approved a revised 2013 budget last week, raising the full-year deficit target to 4.7 percent of economic output from a previous forecast of 3.6 percent. Prime Minister Ivica Dacic’s Cabinet, due to be reshuffled by July 27, plans to sell or close 179 enterprises, which employ around 54,000 workers. Keeping those companies costs as much as 750 million euros ($964 million) a year.

Agreeing on a new accord with the IMF is “important not only for stronger financial support, but also as a clear political signal to investors,” which will help reduce borrowing costs, Deputy Prime Minister Aleksandar Vucic said. “I wish the IMF was less tough on Serbia,” he said.

This year’s shortfall will be “1.5 percentage points lower than last year” while cutting it by additional 1 percentage point “is not realistic,” Dinkic said.

Fiscal Deterioration

The revised budget is a “step in the right direction” though not “sufficient to avoid a risk of fiscal deterioration,” IMF resident representative Bogdan Lissovolik said at the same conference.

Wage and pension cuts are an option and Serbia could seek alternatives in reducing subsidies or introducing a temporary solidarity tax as proposed by the country’s Fiscal Council, Lissovolik said. The government also needs a “credible plan to lower the public debt.”

Serbia has two options available to cut its public debt, which include repaying old costly borrowing with revenue from asset sales or borrowing from a “friendly country at a lower cost,” Dinkic said. First-quarter public debt was 62 percent of gross domestic product and may top 65 percent by the end of 2013, according to the Fiscal Council, a three-member panel appointed by parliament to oversee fiscal compliance.

The government has been in talks with the World Bank to assist its asset-sale plan.

“We stand ready to provide support” and the World Bank will decide in coming weeks “whether financial backing in addition to technical assistance will be provided,” the World Bank’s resident representative Loup Brefort said at the same conference. The World Bank’s funding is usually conditional on the country having an IMF-backed program.

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