August 8, 2012 / 4:48 PM / in 5 years

Serbia seeks new IMF deal, pledges deficit cut

BELGRADE (Reuters) - Serbia said on Wednesday it would immediately seek a new loan deal with the International Monetary Fund and promised to slash its budget deficit as the country tried to calm financial markets unnerved by a power struggle over monetary policy.

Finance Minister Mladjan Dinkic made the pledge a day after a trio of central bank policymakers resigned, accusing the government of usurping the bank’s role, and Standard & Poor’s cut the EU candidate’s credit rating, driving the dinar currency to a record low.

Dinkic, who took office on July 27, said he aimed to cut the deficit from some 7 percent of gross domestic product this year to below 4 percent in 2013, but he did little to answer European Union and IMF criticism of the government move to step up control over Serbia’s central bank.

A lawmaker from the ruling coalition was appointed central bank governor on Monday.

“I expect the central bank to coordinate monetary policy with fiscal policy, the same as in any European country,” Dinkic told reporters. “No more, no less.”

Dinkic said Serbia wanted a new IMF deal to replace the current 1 billion euro ($1.24 billion) standby arrangement that the Fund froze in February over rising debt levels.

“We must talk to them about a completely new arrangement and I have asked IMF representatives to come to Serbia,” Dinkic said. “We are ready to talk to them immediately.”

But the IMF indicated that the row over the bank’s independence would weigh on talks, having already warned of a “major weakening” of its autonomy under new legislation giving lawmakers greater control over the bank.

“The latest changes to the law ... should be carefully studied and reviewed, considering the possibility of considerable negative consequences on overall macroeconomic stability in Serbia, as well as consequences for a program with the Fund,” IMF representative in Serbia Bogdan Lissovolik was quoted as telling the state news agency Tanjug.

The sense of crisis was compounded on Tuesday when three members of the central bank’s Council of Governors joined the governor and vice-governor in resigning, complaining of a serious violation of the principle of central bank independence.

The bank row has deepened concern in the West over the commitment of the new government - an alliance of mainly socialists and nationalists last in power together under late Serb strongman Slobodan Milosevic - to pursue tough political and economic reforms required of it to advance towards the EU.

The bank meets under new Governor Jorgovanka Tabakovic on Thursday to decide its benchmark interest rate.

NO DINAR RALLY

Cutting Serbia’s rating by one notch to BB-, S&P cited the deficit and threats to the bank’s independence, and placed the country on negative outlook. Dinkic said he would seek loans outside the capital markets at interest rates of 3-3.5 percent.

The dinar took little solace from his remarks, weakening again at 1335 GMT to Tuesday’s record low of 119.45. It had rebounded slightly by end of business.

“There is a big question mark over the possible new arrangement with the IMF - the situation is not good and it would be normal to expect further weakening (of the dinar),” said a currency trader at a Belgrade-based bank.

“What’s keeping the dinar from imploding are the steps the new governor could take. The question is when concrete measures will come.”

Dinkic, leader of a small, technocrat party in the coalition, promised to cut the “unsustainable” public debt level of around 55 percent of GDP, which is far higher than the IMF recommends for similar emerging economies.

“Our aim is to bring the deficit down to below 4 percent of GDP from 7 percent, and below 3 percent in 2014, which would make it more sustainable,” Dinkic said, adding that he would present the draft 2013 budget by the end of October.

His hands, however, are tied to a degree by resistance to any radical spending cuts among the Socialists of Prime Minister Ivica Dacic and the small Pensioners Party.

Dinkic said the government was looking at raising value added tax from 18 percent, but not to over 20 percent. Public sector wages and pensions would not be frozen, but nor would they rise “as much as before”, he said, adding that there would be no lay-offs yet.

He predicted the economy would shrink between 0.5 and 1.0 percent in 2012, following a 1.3 percent GDP contraction in the first quarter and 0.6 percent in the second.

Editing by John Stonestreet

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