IMF May Impose Fiscal Conditions On Serbia Loan

by Mike Godfrey, Tax-News.com, Washington

17 August 2009

The IMF has confirmed that it is sending a mission to Serbia on August 24 for a review of a USD4bn stand-by arrangement, which was approved in May 2009. Recent reports indicate that Serbia needs the facility to finance its budget deficit and the task of the IMF mission will be to determine fiscal conditions, if any, for the continuation of the facility.

The borrowing was originally for balance of payments purposes, but this aspect has been superseded by a separate IMF USD500m loan which the IMF is making under general arrangements to augment currency reserves, and an expected improvement in the current account deficit to less than 10% of GDP.

In their March 2009 mission statement, the IMF already indicated that its stand-by arrangement was to work in tandem with a large fiscal adjustment package to contain the 2009 deficit to 3% of GDP – the "maximum level that can be financed through non-inflationary sources." The IMF has also coordinated finance from a group of foreign banks with substantial investments in Serbia, who also rely on the IMF to impose the appropriate degree of fiscal rectitude in providing additional finance.

According to press announcements from Minister of Economy Mlađan Dinkić, the coalition government of pro-western parties and the Socialists would prefer the IMF to approve a projected increase in the budget deficit to 4.5% of GDP. Dinkić ruled out a VAT increase suggested by the Central Bank, but the government may be willing to cut employee numbers in the public sector drastically, in the bureaucracy but also significantly in education and health care.

It is not usual IMF policy to lend money to assist in financing budget deficits, but in this present crisis it is not unprecedented, and the Serbian government will no doubt point to recent assistance given to Bosnia, Hungary and the Ukraine to strengthen its case.

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