IMF: Wage growth unsustainable

IMF: Wage growth unsustainable

B92: What do you think of this new budget, that has, despite your recommendations on savings, enlarged expenditure approximately for RSD 128bn against previous year, while estimated deficit is at RSD 13.5bn?

Hirschhofer: Unfortunately, this budget will most likely contribute to further deepening of trade and current account deficit and will make central bank’s work in maintaining current low inflation very difficult.

B92: Is it possible to fight inflation only by using monetary instruments, as we did last year?

Hirschhofer: I believe that monetary policy was very successful in Serbia. Inflation, which was extremely high, is reduced to the levels where NBS’ projected inflation goals can be easily achieved.

Now it is necessary to keep low inflation levels, and for that the central bank needs clear support of a good fiscal policy. If such support is missing, if deficit is to be larger than last year’s, then monetary policy measures will have to be even more strict, whether by increasing mandatory reserves or repo rate.

It will be even more difficult, and costs of keeping the inflation at the low levels will be even higher.

B92: After the budget was adopted, do you think that Serbia’s monetary policy is supported by the fiscal policy?

Hirschhofer: If you look at the 2007 budget, what are our three main concerns? First, a few taxes were reduced, and that reduction is not appropriate in a situation where you have high current account deficit.

Unfortunately, salary expenditures grow dramatically, and at exceptionally high speed, and the third issue is the National Investment Plan. It is a very ambitious project, Serbia needs investments, but they have to be well directed, in which unfortunately we are not convinced at the moment.

Nevertheless, we are most concerned with the high salary increase. Public sector wages rose almost 30 percent in the last 12 months, health and social services a staggering 41 percent.  I am talking about real, and not nominal growth, that is, inflation rate included.

It is quite clear that this is unsustainable. Government of the Republic of Serbia needs to take that into consideration. If not this year, then certainly, the next.

B92: What do you suggest then? Where can savings be made?

Hirschhofer: We have not discussed any details, but the key thing is to increase productivity. Serbia needs good health protection, and that is most important, but it has to be done in an effective manner. I believe that that issue is still open.

B92: What are the concrete steps Serbia should make in order to improve economic situation and standard of its citizens?

Hirschhofer: I wrote an op-ed on that subject that was published in the daily Danas last weekend. I pointed at a couple of things there. The most important one is that Serbia should stay open to the rest of the world, to other economies.

That is a way to establish a good quality of products and prices. The companies must have macroeconomic stability in order to be open and competitive. Entrepreneurs must focus on innovation and production, and not worry about macroeconomic instability.

That is why stability is crucial, but not everything is in that. It is only a necessary precondition. The public sector needs to be efficient. Tax payers should have good public services financed from paid taxes.

It is crucial for the public sector to become more efficient. If you think of Serbia as a football team, and the public sector as a player, unfortunately that player is overweight and cannot run fast. It needs to sweat-off fat and learn to run faster, to be more efficient as a part of the team.

Another important element is the reform of regulatory infrastructure. The regulatory agencies must be more efficient in order to ensure competitive markets, both telecommunication, and electricity market. A firm regulatory framework is necessary.

Privatization is an important element which should make the sectors in which the state has the monopoly more efficient. You don’t have to go abroad to see the benefits of privatization, you can see it here as well.

You can see the examples of successful privatization in some sectors, in the banking sector, for instance. Thanks to the privatization and good regulatory framework the banking sector now offers better services, employs more people and is more efficient than before when it was in a crisis. What was done in the banking sector can be done in NIS and in electricity sector as well.

B92: You mentioned NIS and electricity. What are you comments on the new Government announcements of a slowdown in the privatization process? It seems that the Government does not want to sell the energy sector companies in the near future, at least not the majority share?

Hirschhofer: IMF has been pointing out that privatization is an efficient way to bring investments in, to create employment and stimulate growth. That must be done despite an inefficient regulatory framework, and that is very important.

The legislators must be strong and independent, and privatization is crucial. I repeat – what was done in the banking sector, can be done in other sectors as well. There is no need to think that air traffic must stay in the same condition it finds itself in now.

We keep instigating the Government to continue with decisive, fair and transparent privatization, as soon as possible.