Finance chief confident of IMF agreement

Diana Dragutinovic is confident the government will manage to reach an agreement with the IMF on increasing the 2009 budget deficit from 3 to 4.5 percent GDP. The finance minister said that the government would propose credible measures to cut the deficit. Finance chief confident of IMF agreement “I believe that the agreement will be as follows: they will definitely allow us to increase the deficit, but we will have to propose credible deficit reduction measures,” Dragutinovic told Tanjug. The minister pointed out that Serbia had fulfilled almost all of the assumed obligations from the arrangement with the IMF, except for the fiscal deficit. She underscored that public sector redundancies, as a means of trimming public expenditure, required time, in order not to avoid a repeat of a previous scenario, where redundant employees received a pension plan, and new people were promptly hired in public administration to take their place. It is certain, however, that the salary and pension freeze will be extended to 2010, Dragutinovic said. “First, I expect the government and IMF to assess the macro-economic situation together and to reach an agreement over the current state of play,“ the minister said, ahead of the IMF delegation’s visit to Serbia in late August, when the first revision of Serbia’s standby arrangement with the institution will be conducted. “A joint assessment of the macro-economic situation is important, as it determines what kind of fiscal and monetary policy will be pursued after the talks with the IMF,“ she said, adding that Serbia had met other conditions too, such as the maximum level of public spending, which was also below the limit. Dragutinovic said that, without the crisis and the fall in economic activity, the government’s measures would have brought the budget deficit down to just 1-1.5 percent GDP. The forecast budget deficit of 4-4.5 percent GDP by the end of the year “will disappear as soon as the economy begins to grow,“ she said. “We expect the IMF to seek credible measures to cut the deficit by 1-1.5 percent GDP, not altogether. I think that will be our scope for talks, and we’ll have the freedom to propose measures, and they to deem whether those measures are credible,“ the minister explained. Dragutinovic said that the fiscal deficit could be cut either by increasing revenue or cutting spending, or a combination of both, as there was no other alternative. Asked whether the government had devised a platform for the talks with the IMF mission, she replied that there were various options that would ultimately yield savings or a 1.5 percent reduction in the deficit, adding that she, as the minister, would be proposing measures, and that it was up to the government which ones to adopt. The minister added that she did not expect the IMF to set any new conditions, since, she said, she had had the opportunity to speak with IMF officials on a number of occasions, and there had never been any political conditioning. “I wouldn’t expect them to condition us. We ourselves should be aware that something substantial needs to be done. We pursued an unsustainable fiscal policy for too long,“ she said. As regards the exchange rate, Dragutinovic, the former National Bank vice-governor, said that the dinar was not only stable, but had even strengthened against Western currencies in the last month and a half, thanks primarily to the IMF arrangement. She said that of the EUR 3bn loan agreed with the IMF, Serbia had drawn EUR 800mn as hard currency reserves for the NBS, and that “not a single euro of those funds has been spent.“ “There’s no need to take out the new tranche, but it’s definitely good, in any case, for unforeseen circumstances, to have secure funds you can draw on without jeopardizing the funding of external solvency,“ she said, adding that a balance of payment surplus had been registered in May, the first such for many years. Asked whether compliance with the obligations from the IMF arrangement meant salary and pension cuts for direct budget-users, or even redundancies, the minister said that redundancies in the public sector were currently unrealistic. “If you only want to cut one percent GDP from budget spending, you need to lay off 50,000 people overnight, of altogether 460,000 employees. That means laying off half of the employees in health care as an example, or half the people employed in education, or to abolish the courts or police, “ Dragutinovic said. “I think that this is impossible to do overnight; even if it was possible, it shouldn't be done. The government should not exacerbate the crisis, but minimize the negative effects. I am not saying that redundancies shouldn't be made, that the number of employees should not be cut, but I want to make clear that it takes a lot of effort to cut public spending just by one percent GDP,” she said. “The government has set the basis for cutting public spending by freezing wage and pension increases, and will probably extend the freeze into 2010, if the economic situation does not improve more dynamically and if there is no GDP growth,” the finance minister said. “If there was five percent growth, I am sure that 70 percent of our problems, as far as public spending is concerned, would be solved,” she said. As far as the financing of Corridor 10 is concerned, Dragutinovic said that the government would insist on this, especially since it was being mostly financed by loans from international financial institutions, adding that savings could always be made on smaller investment projects that could be suspended temporarily or permanently. Summing up future plans for cutting public spending, Dragutinovic said that there should be a combination of tax reforms and spending cuts that would not call into question the level of wages or pensions, without giving up on the Corridor 10 project. Diana Dragutinovic (FoNet, archive)

Finance chief confident of IMF agreement

“I believe that the agreement will be as follows: they will definitely allow us to increase the deficit, but we will have to propose credible deficit reduction measures,” Dragutinović told Tanjug.

The minister pointed out that Serbia had fulfilled almost all of the assumed obligations from the arrangement with the IMF, except for the fiscal deficit.

She underscored that public sector redundancies, as a means of trimming public expenditure, required time, in order not to avoid a repeat of a previous scenario, where redundant employees received a pension plan, and new people were promptly hired in public administration to take their place.

It is certain, however, that the salary and pension freeze will be extended to 2010, Dragutinović said.

“First, I expect the government and IMF to assess the macro-economic situation together and to reach an agreement over the current state of play,“ the minister said, ahead of the IMF delegation’s visit to Serbia in late August, when the first revision of Serbia’s standby arrangement with the institution will be conducted.

“A joint assessment of the macro-economic situation is important, as it determines what kind of fiscal and monetary policy will be pursued after the talks with the IMF,“ she said, adding that Serbia had met other conditions too, such as the maximum level of public spending, which was also below the limit.

Dragutinović said that, without the crisis and the fall in economic activity, the government’s measures would have brought the budget deficit down to just 1-1.5 percent GDP.

The forecast budget deficit of 4-4.5 percent GDP by the end of the year “will disappear as soon as the economy begins to grow,“ she said.

“We expect the IMF to seek credible measures to cut the deficit by 1-1.5 percent GDP, not altogether. I think that will be our scope for talks, and we’ll have the freedom to propose measures, and they to deem whether those measures are credible,“ the minister explained.

Dragutinović said that the fiscal deficit could be cut either by increasing revenue or cutting spending, or a combination of both, as there was no other alternative.

Asked whether the government had devised a platform for the talks with the IMF mission, she replied that there were various options that would ultimately yield savings or a 1.5 percent reduction in the deficit, adding that she, as the minister, would be proposing measures, and that it was up to the government which ones to adopt.

The minister added that she did not expect the IMF to set any new conditions, since, she said, she had had the opportunity to speak with IMF officials on a number of occasions, and there had never been any political conditioning.

“I wouldn’t expect them to condition us. We ourselves should be aware that something substantial needs to be done. We pursued an unsustainable fiscal policy for too long,“ she said.

As regards the exchange rate, Dragutinović, the former National Bank vice-governor, said that the dinar was not only stable, but had even strengthened against Western currencies in the last month and a half, thanks primarily to the IMF arrangement.

She said that of the EUR 3bn loan agreed with the IMF, Serbia had drawn EUR 800mn as hard currency reserves for the NBS, and that “not a single euro of those funds has been spent.“

“There’s no need to take out the new tranche, but it’s definitely good, in any case, for unforeseen circumstances, to have secure funds you can draw on without jeopardizing the funding of external solvency,“ she said, adding that a balance of payment surplus had been registered in May, the first such for many years.

Asked whether compliance with the obligations from the IMF arrangement meant salary and pension cuts for direct budget-users, or even redundancies, the minister said that redundancies in the public sector were currently unrealistic.

“If you only want to cut one percent GDP from budget spending, you need to lay off 50,000 people overnight, of altogether 460,000 employees. That means laying off half of the employees in health care as an example, or half the people employed in education, or to abolish the courts or police, “ Dragutinović said.

“I think that this is impossible to do overnight; even if it was possible, it shouldn't be done. The government should not exacerbate the crisis, but minimize the negative effects. I am not saying that redundancies shouldn't be made, that the number of employees should not be cut, but I want to make clear that it takes a lot of effort to cut public spending just by one percent GDP,” she said.

“The government has set the basis for cutting public spending by freezing wage and pension increases, and will probably extend the freeze into 2010, if the economic situation does not improve more dynamically and if there is no GDP growth,” the finance minister said.

“If there was five percent growth, I am sure that 70 percent of our problems, as far as public spending is concerned, would be solved,” she said.

As far as the financing of Corridor 10 is concerned, Dragutinović said that the government would insist on this, especially since it was being mostly financed by loans from international financial institutions, adding that savings could always be made on smaller investment projects that could be suspended temporarily or permanently.

Summing up future plans for cutting public spending, Dragutinović said that there should be a combination of tax reforms and spending cuts that would not call into question the level of wages or pensions, without giving up on the Corridor 10 project.