INTERVIEW -- Serbia's C-bank Ready To Cut Key Rate Further in 2009 if Prices, Budget Gap Permit

“My colleagues and I will certainly be prepared to further lower the repo rate as early as this year, if these two key conditions are met,” he said, adding that the government will have to cut  budget deficit to 3.5%-4.0% of the projected gross domestic product (GDP) next year from 4.5%-5.0% planned for this year.

"The other thing is will the government abide by what was agreed at the end of last year, that is will government-controlled prices grow by maximum 9.0%,” Governor Radovan Jelasic told SeeNews in an interview. Government-controlled prices grew 14.9% in the first eight months of this year.

The National Bank of Serbia (NBS) expects the country's consumer price index (CPI) to rise 9.0% in 2009. CPI is expected to remain flat in the third quarter of 2009 compared to the previous quarter. NBS expects 6.0% inflation next year with a variation band of two percentage points on either side provided government-controlled prices will grow by 11% with the same variation band.

Serbia’s September consumer price index (CPI) rose 0.3% month-on month after edging down 0.1% in August, the country’s statistics bureau said earlier this week. On an annual basis, inflation slowed to 7.3% last month from 8.0% in August.

NBS lowered its key repo rate to 11% from 12% last week. It has cut the rate from 17.75% over the course of this year, aiming to stimulate Serbia's economy amidst the global slowdown.

GROWTH FORECASTS

Referring to the forecast made by the International Monetary Fund (IMF) that Serbia’s economy will grow by 1.5% next year, Jelasic said it is “important to highlight that the 2010 economy will grow by 1.5%  in relation to 2009 and not to 2008."

“Because, if we have a contraction of the economy by 3.0% in 2009, and then the economy grows by 1.5% this is far from the growth we posted in 2008. A 1.5% growth sounds great but we must keep in mind that this projection was made in relation to 2009,” Jelasic explained.

“Our prognosis for the 2010 economic growth is 1.5%. But we are yet to see what projections the IMF will make during its visit here,” he added.

An IMF mission is scheduled to arrive in Belgrade later this month to review the country’s performance under the two-year, 3.0 billion euro ($4.5 billion) funding arrangement which the country signed with the global lender in March. The disbursement of 1.4 billion euro from the aid package hinges on the results of the review.

Jelasic also said that raising Serbia's value added tax (VAT), currently at 18%, may be on the agenda next year if the government fails to make the necessary spending cuts.

“Obviously, if the state makes sufficient cuts in public spending, than no raising of VAT is going to be needed,” he said.

SPENDING CUTS

The IMF has agreed to a rise in Serbia's 2009 budget deficit forecast to 4.5% of GDP from 3.0% projected initially, and to a freeze of salaries and pensions in 2010 in exchange for an overhaul of the public sector.

Serbia adopted its first law openning the way for cuts in public administration workforce last week. The adopted legislation envisages close to 3,000 lay-offs. Belgrade also plans to adopt a law on public employees and a law on the maximum number of those employed in local administrations, Economy Minister Mladjan Dinkic has said.

“That’s a good start. If they lay off 3,000 people it will save Serbia about 2.5 billion dinars ($40 million/26.8 million euro) a year. It’s a start in the good direction but more concrete measures are needed within the context of the 2010 budget. This means cutting the budget gap from current 4.5%-5.0% to some 3.5%-4.0%,” Jelasic said.

“If out of total savings that we need in 2010, roughly some 40 billion dinars, these measures are going to save us some 2.0-2.5 billion, you can calculate how big of a saving this is.”

CRISIS OVER?

Commenting on the forecast Dinkic made earlier this week that Serbia will exit the economic crisis in the first quarter of next year at the latest, Jelasic said much depends on how exiting is interpreted. He said earlier this month that according to NBS estimates Serbia's economy contracted by a real 2.7% in the third quarter of 2009, year-on-year, after shrinking by 4.1% in the first half of 2009.

“If by exit a positive growth of GDP is meant, we already experienced it in the third quarter of this year, when compared to the second quarter which was, by far, the worst,” Jelasic explained.

Serbia's economy contracted by a real 4.0% on the year in the second quarter of 2009 after growing by a revised 6.4% a year earlier, the country's statistics office said. Contraction measured a revised 4.2% year-on-year in the first quarter versus a 3.0% real growth in the last quarter of 2008.

“Next year will also be positive when compared to 2009, but if we look at the nation’s standard of living, tax revenue, we won’t have significant improvement before 2011, that is a return to the level reached in 2008, before the crisis came.”

Serbia’s GDP slowed its rise to a real 5.4% in 2008 from 6.9% in 2007.

(1 euro=93.2518 Serbian dinars)