IMF Leaves Serbia Without Agreement on Loan Payments, Talks to Continue

An International Monetary Fund mission said it will leave Belgrade today without an agreement on disbursement of the next tranche of Serbia’s bailout loan as the government works to meet fiscal targets for next year.

Talks will continue on the efforts by Prime Minister Mirko Cvetkovic’s administration to narrow the budget deficit to 4 percent of gross domestic product in 2011 from 4.8 percent this year, mission chief Albert Jaeger said in an interview. The target must be met to secure the next installment of Serbia’s 3 billion-euro ($4.3 billion) emergency loan package.

“I don’t think that anything went really wrong in the talks, it’s just not easy to come up with a 2011 budget in line with fiscal rules,” he said in Belgrade, the Serbian capital. “We have made progress, but we still aren’t there.”

The government is struggling to find ways to reduce spending and boost tax collection without cutting too many popular social benefits as it brings the economy into line with European Union norms. The current spending plan for 2011 exceeds the target by 0.5 percent of GDP, Economy Minister Mladjan Dinkic said in an interview in Bratislava, Slovakia today.

“I am pretty optimistic we will close negotiations this month,” he said. Cabinet is working on cutting expenditures and the IMF, which said an initial agreement may be reached “soon,” isn’t dictating which items should be trimmed, Dinkic added.

IMF Aid

The former communist countries of Europe and central Asia are recovering from their deepest recessions since switching to free-market policies, after cheap credit helped growth average 5 percent annually in the years before the credit crunch. The IMF provided more than $70 billion of loans to the region during the global financial crisis, making it the largest recipient of bailouts.

Serbia, Hungary, Latvia, Ukraine and Romania all received loans as they struggled to refinance debt, often denominated in foreign currencies. The region received more than $100 billion in total, including aid from the European Union and World Bank.

Cvetkovic’s government, which faces a general election in 2012, met quarterly budget targets for September “and they’re pretty close” to meeting the goals for the entire year, Jaeger said.

“The recovery in Serbia is kind of proceeding, maybe a little bit better than we expected, but not enough for us to change our target” of 3 percent economic growth next year, he said. “It’s mainly export driven, especially to EU markets, but exports to the region around Serbia are not quite there compared with pre-crisis levels.”

‘Tighter’ Fiscal Policy

While Serbia is unlikely to meet its 2010 and 2011 inflation targets as currency declines push price expectations higher, consumer-price growth will return to target levels in the second half of 2011, Jaeger said, noting that monetary policy has to be supported by “tighter” fiscal policy.

“The central bank has tools to bring inflation back to the target in a reasonable period of time,” he said. “What the central bank can do is to be effective in communicating how they see the inflation outlook and how they plan to keep inflation within target.”

The weakening of the dinar, which has lost 11 percent since the start of the year, has made the economy “more competitive, but the depreciation has its consequences for companies with euro exposure, so in balance inflation targeting is the policy choice” for the central bank, he said.

“When you target inflation, you have to have a flexible exchange rate,” Jaeger said. “The dinar has depreciated by a substantial amount but in our point of view there are no strong reasons for it to depreciate more.”

The IMF hopes Serbia will adopt new rules on corporate debt restructuring by early 2011 to start addressing a rise in non- performing loans at banks, Bogdan Lissovolik, the fund’s representative to the Balkan nation, said at the same interview today.

The central bank’s supervision of the industry was “quite prudent” during the crisis, though “there is a need to clean up those debts,” he said.

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