Serb officials turn sour on economy

Reuters, Monday October 27 2008

BELGRADE, Oct 27 (Reuters) - Serbia is facing an economic slowdown in 2009, Prime Minister Mirko Cvetkovic said on Monday in an acknowledgement that world economic turmoil would likely have a greater impact that initially thought.

"The impact of the global financial crisis will be seen in lower rate of economic growth," Cvetkovic told a business forum. "We are currently planning growth of four percent in 2009. It can be considered almost as a recession because Serbia has had growth of above seven percent for several consecutive years."

Although it aspires to one day join the European Union, Serbia, as well as much of the Balkans, is not as integrated into the world economy as the rest of Europe, and had hoped to escape the worst of the world's financial headaches.

The prospect of weaker growth now keeps the central bank on alert for evidence that foreign capital inflows are drying up amid fears it will be harder attract investors or creditors, central bank governor Radovan Jelasic said. Cvetkovic said the expected slowdown would pressure the government to tighten fiscal spending in 2009.

"We are preparing the budget in consultations with the International Monetary Fund and the budget is expected to show a deficit of below two percent of GDP and public spending should not exceed 44 percent of GDP," he said.

NO SPENDING CUTS A top Finance Ministry official said severe cuts in the 2009 fiscal deficit and public spending would be inappropriate.

"At the time of contracting demand, we should not make drastic cuts in public spending because there will be no capital inflows from other sides," said Janko Guzijan, state secretary at the Finance Ministry. Some fiscal stimulus was needed to allow the economy survive the crisis, he said.

Much of Serbia's economic activity comes from food and agriculture, metals and mining, and pharmaceuticals.

Central bank governor Jelasic said monetary policy would have to remain tight. "While an economic slowdown in Europe leads to easing of inflationary pressures, lower economic growth in Serbia also means higher inflation," Jelasic told the forum.

Core inflation remained above 10 percent in September. The bank hopes to steer core inflation towards 8.7 percent by the end of 2008 and bring it down within a 3-6 percent corridor by mid-2009.

"The central bank will have to keep the policy tight because inflation has not been defeated," he said, adding that the global turbulence would also affect the dinar currency.

"Inflation and the current account deficit are our key challenges and the only question is what stops us from dealing with them," Jelasic said.

Problems to finance the current account deficit, at 18.5 percent of GDP so far this year, could force Serbia into seeking a financial deal with the International Monetary Fund, officials say.

Serbia needs between 600 and 800 million euros a month to finance the current account deficit, and has used mainly foreign direct investments and credits to cover the gap, Guzijan said.

Finance Minister Diana Dragutinovic said on Friday that Serbia is looking for a "firm" programme with the IMF that would boost creditor and investor confidence.

Talks on a new programme are under way, she said, adding that an IMF delegation is due to arrive in Belgrade on Oct. 28 to discuss the new arrangement.