Serbia tries austerity despite warnings

Serbian Finance Minister Lazar Krstic.

Serbian Finance Minister Lazar Krstic.

Published Oct 22, 2013


Belgrade - A new call for austerity in Serbia is a step in the right direction, but the government should do more if it wants to revive its ailing economy, analysts warn.

With a budget deficit likely to hit 7.5 percent of output and public debt to surpass 60 percent, the government has opted for an austerity programme that includes public sector wage cuts and a sales tax hike.

The International Monetary Fund, with whom Serbia hopes to strike a loan deal next year, said measures, if fully implemented in 2014, would be “an important step in the right direction.”

Abbas Ameli-Renani, analyst at Royal Bank of Scotland, said the measures “most importantly... should serve to keep the IMF engaged and willing to formalise a loan arrangement.”

An IMF loan worth one billion euros ($1.3 billion) was frozen in February 2012 because the previous government had not complied with commitments.

But austerity measures alone would not be enough to meet IMF demands and would fail to significantly fix the budget, Serbian analyst Milan Culibrk said.

“With these measures alone there is no way they can ... deliver a sustainable deficit (target),” Culibrk said.

Serbia's public sector employs almost 700,000 people out of Serbia's total work force of 1.7 million people and slashing salaries by the proposed 25 percent without cutting jobs will not be enough, he said.

Many state employees see the measures as just “another hit on our incomes,” said Irina Todorovic, a 38-year-old teacher.

“Teachers are already humiliated with the lowest salaries among those paid by the state, which apparently does not care about educating its future working force,” she said.

Culibrk, the analyst, urged the government to deal with over-indebted public companies otherwise Serbia would only continue to borrow money to cover costs.

The IMF also warned that “wide-ranging structural reforms should support fiscal adjustment.”

“Steps to improve the business climate and reduce the state's footprint in the economy are needed to provide impetus to investment, economic diversification, and sustainable private sector growth in order to create jobs,” the IMF said.

Both newly appointed Finance Minister Lazar Krstic and Economy Minister Sasa Radulovic said they planned more measures to ensure growth, which in 2013 was expected to be around 1.7 percent, according to IMF.

“We identified the grey economy, estimated to be worth 30 percent of the GDP, as an easy target that could provide first results quite fast,” Radulovic said.

Fighting the informal economy had also been the first piece of advice by ex-IMF chief Dominique Strauss-Kahn, recently hired to advise the government.

Strauss-Kahn had no role in preparing the austerity package, but consults on mid- and long-term reforms, a government source told AFP.

“If we manage to narrow the grey economy we could get a GDP growth” worth up to 10 billion euros ($13.5 billion), Radulovic said.

By mid-2014, Serbia should also find a solution for 179

state-owned companies set to be privatised, he said.

But Culibrk warned that “all those plans look rather like a wish-list.”

“Let see what will be implemented, as even these austerity measures are a difficult sell to the unions and an army of public sector employees,” he said.

Rating agency Fitch said the government's plans to “stabilise public finances show a commitment to fiscal consolidation and structural economic reform.”

“But weak economic growth and implementation risks pose significant challenges to meeting targets,” it added.

Fitch affirmed Serbia's 'BB-' rating with a negative outlook in July.

“Failure to adopt a credible plan to reduce the deficit and stabilise debt could lead to a downgrade, while doing so in a manner that put public debt on a sustainable path would alleviate pressure on the rating,” the agency said.

Deputy Prime Minister Aleksandar Vucic has recently said that the measures are desperately needed as Serbia is “on the verge of bankruptcy” and faced with “rating downgrades.”

However both Culibrk and Ameli-Renani saw the warning as a way to fend off public anger.

“Undoubtedly, such wage cuts would be politically difficult to implement, especially on the backdrop of over 7 percent inflation,” Ameli-Renani said.

“By sounding the alarm of bankruptcy and rating downgrades, Vucic may be intending to soften any domestic opposition to harsh austerity measures,” Ameli-Renani said. - Sapa-AFP

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