August 20 (SeeNews) - The International Monetary Fund (IMF) may consider allowing Serbia to use part of its current 3.0 billion euro ($4.3 billion) standby loan to back the country's budget - only if exceptional circumstances justify such a step, the global lender said.
“A possible use of IMF money for budget support is not automatic and would require some exceptional circumstances and an agreed framework. This has yet to be discussed for Serbia, although other countries like Hungary and Ukraine have reached agreement to use IMF funds for budget support,” the IMF resident representative in Serbia, Bogdan Lissovolik, told SeeNews in an e-mailed interview.
An IMF mission is scheduled to arrive in Belgrade on August 24 for the second review of the country's performance under the two-year stand-by funding arrangement signed in March. The mission will be doing its job amidst widespread protests over unpaid wages and clashing viewpoints within the coalition government on the narrowing of the budget gap, now equivalent to some 4.5% of the projected gross domestic product (GDP), up from 3.0% initially approved by the IMF for the end of the year.
Economy Minister Mladjan Dinkic said earlier this month he will not support a rise in value added tax (VAT) and personal income tax as means of narrowing the budget gap because higher taxes would further depress consumer demand amidst the economic downturn and will heavily weigh on the middle class in Serbia.
Finance Minister Diana Dragutinovic said she stood by her proposal to raise to 20% the income for monthly salaries higher than 40,000 dinars ($611/429 euro) and cut to 10% the tax on salaries lower than that in a bid to cut the budget deficit. She also didn’t dismiss the possibility of raising VAT. Serbia’s personal income tax rate now stands at 12%, while VAT is 18%.
Lissovolik said that the IMF mission will seek “balanced and credible measures that take account of recent developments, and are aimed at credibly securing fiscal sustainability.”
“We feel there is substantial potential in curbing spending through rationalization and reform," he said, adding that "rationalization should preferably concern all areas of public spending, but especially pensions, wage bill, health care, education, and subsidies.”
“Such measures, based on well-designed efficiency improvements, would replace ad-hoc steps such as nominal freezes, on which fiscal adjustment in Serbia has largely relied to date.”
Lissovolik also said the IMF is currently updating its macroeconomic projections for Serbia and the Fund's 2009 GDP forecast is worse than the initially projected 2.0% fall in Serbian GDP.
Serbia’s GDP will contract by close to 5.0% in the second quarter, while a modest growth is expected in the third quarter, central bank Governor Radovan Jelasic said last month. The country's economy contracted by a real 3.5% on the year in the first quarter of 2009 after growing by a revised annual 8.5% a year earlier. Serbia’s GDP slowed its growth to a real 5.4% in 2008 from 6.9% in 2007.
“The output weakness has hurt revenues, so our projection of the fiscal deficit has worsened compared to what was assumed in the program,” he said.
But despite gloomy aspects going forward, Lissovolik said worries over the short-term financial situation have somewhat receded.
“The financial sector is holding up, reflecting good capital and liquidity buffers, while the balance of payments net inflows and reserves have been better than expected. But risks in these areas of course should be monitored.”
He pointed out that the biggest short-term challenges for Serbia are concentrated in the fiscal area, with further progress needed in tax administration and compliance, expenditure control at all government levels, and debt management.
“More fundamentally, now is the crucial time to carry out longer-term reforms both in public expenditure, as discussed above, and the broader economy (such as further steps to strengthen competition and the business environment and reform the overextended public enterprise sector),” he said, adding that many of these reforms had been repeatedly delayed but would be key to generating the much needed growth in economic activity and exports.
“These reforms should create the fiscal space for additional high-quality infrastructure spending, which is a further major challenge. We hope that the coalition would be united and agree on the best decision possible in the interest of Serbia,” he said.
(1 euro=93.1726 Serbian dinars)