UPDATE 1 - Serbia, IMF Sign Standby Agreement, Agree on 2009 Budget Deficit of 1.5%/GDP

“This arrangement has to support the government’s economic policy in order to maintain macroeconomic and financial stability,” the government said in a statement.

Finance Minister Diana Dragutinovic, central bank governor Radovan Jelasic and the head of the IMF mission to Belgrade, Albert Jaeger, are expected to give more details on the arrangement at a news conference later on Friday.

Serbia completed a three-year standby arrangement with the IMF in February 2006.

Economists have said the IMF mission, which advised the Serbian government on the drafting of the country's budget for next year, is expected to ask the government to cut spending in the 2009 budget and scrap its plan to raise pensions to 70% of average net salaries. The IMF has also recommended that Serbia halve its current account deficit set at 18.5% of the gross domestic product projected for 2008.

As of October, Serbia raised pensions by 10%, which increased its budget deficit to 2.0% of the country’s GDP, from 0.5%. The new government, which stepped into office in July, has pledged to raise pensions to up to 70% of the average net salary. Analysts, however, have said Serbia should cut its fiscal spending to avoid crucial macroeconomic blunders.

The country spends 500 billion dinars ($7.3 billion/5.9 billion euro) more than it earns annually, with overspending going mainly to consumption rather than investment, Jaeger said in September.

(1 euro = 85.303 dinars)