Serbia Delays IMF Talks, Supplementary Budget as GDP May Shrink

Serbia may postpone holding loan talks with the International Monetary Fund along with a budget revision as it tries to assess if the economy contracts or stagnates after recent floods.

Talks with the IMF may be held after the lender’s mission completes Article IV consultations with authorities “sometime in the fall,” Finance Minister Lazar Krstic told an economic conference in Belgrade today. The economy, he said, will either stagnate or shrink 0.5 percent this year. An annual contraction would make it the third since 2009. He didn’t give more precise timing on when a potential deal could be reached.

Premier Aleksandar Vucic, whose government was sworn in on April 27, has delayed talks with the IMF twice in recent weeks, initially promising a deal with the Washington-based lender in June and then in July. The country is also struggling to deal with floods last month that killed at least 19 people in the largest former Yugoslav republic. The government expects to tally up the damage by end-July to start working on new fiscal targets for this year, Krstic said.

“We will have an IMF mission related to Article IV consultations” which may lead to talks on a three-year stand-by loan by the end of this year, he said.

Facing Delays

After participating in the previous government, Vucic’s party of former nationalists won an absolute majority in March 16 elections, gaining the strongest lock on power in more than two decades, when Slobodan Milosevic was still in control.

While he now plans to prepare Serbia for European Union membership by 2020 and is counting on billions of dollars of investment from the United Arab Emirates to create jobs in an economy where one in four people is unemployed, he’s facing delays in both areas.

The EU will probably open negotiations on the first chapter of EU policy areas in October instead of June, Vucic said this month, after a June 11 meeting with German Chancellor Angela Merkel. Meanwhile, the U.A.E. invested 0.3 million euros this year so far, central bank data show.

The yield on Serbia’s 10-year dollar bonds maturing in 2021 rose 2 basis points, or 0.02 percentage point, to 4.733 percent today, data compiled by Bloomberg show. The dinar traded 0.03 percent weaker at 115.5269 per euro at 3:30 p.m. in Belgrade.

Serbia is running the highest budget shortfall in Europe and it’s “getting closer to the state of pre-bankruptcy” with its public debt soon to reach 80 percent of GDP, Vladimir Vuckovic, a member of the Fiscal Council, a three-member body overseeing fiscal compliance, told B92 TV broadcaster today.

‘Pre-Bankruptcy State’

Revising the budget will require new spending, revenue and deficit targets after the budget gap exceeded 60 percent of planned full-year total at end-May.

Vucic pledged to embrace painful austerity endorsed by the IMF, which involves saving as much as 1.4 billion euros ($2 billion) in three years, cutting public-sector jobs and ending subsidies to 153 enterprises which employ about 60,000 workers and drain about $1 billion a year from the budget.

“Energetic fiscal consolidation and discipline are imperative to establish political responsibility and precondition for any growth in the future,” he said.

The absence of growth will make it difficult to pursue a major fiscal overhaul, deputy Prime Minister Kori Udovicki told the same conference. Credit activity is weak as the government keeps crowding out the private sector, and banks are reluctant to lend to private clients due to high bad loans, she said.

The government will also take an extra two years to complete the sale of 600 companies, pushing back a previous plan until end-2016, Economy Minister Dusan Vujovic said today. Starting that process this month and revising the budget was a condition for Serbia to qualify for $250 million in World Bank loan to help finance the budget.

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