Serbia risks defaulting on its loans to multilateral creditors
unless urgent measures are taken to ensure fiscal
responsibility, the countrys central bank chief has
We need reforms and responsible spending or else there
will not be enough money to pay back [the] loans, Radovan
Jelasic, national bank of Serbia (NBS) governor told
in an interview.
The governor urged a budget deficit ceiling of 3% of GDP
which would provide an institutional guarantee of prudence and
boost market confidence. He also called for fiscal
responsibility to be enshrined in the constitution.
Serbias deficit is currently 2.6%.
He added that the governments reliance on external
borrowing sources might undermine a culture of responsible
Getting cheap money is not the best way to teach you
fiscal prudence, he said. This contrasts with the market
discipline instilled by borrowing in the international
He also said revenues could undershoot government forecasts as
market expectations of a 3.5% contraction in growth this year
could prove optimistic amid a severe regional meltdown.
The IMF lent Serbia 3 billion under a bailout plan in
March that replaced a smaller package in January, as the
country was hit by greater slump than expected.
The deal envisages a 2.3% fiscal deficit this year as well as
large-scale public spending cuts. Rising domestic discontent
has potentially restricted the scope for further austerity
The IMF deal has helped the country negotiate loans from other
international creditors. On Monday, the European Investment
Bank announced series of loans worth over 1.4 billion euros
over the next two years. At the end of last month, the World
Bank agreed to provide the country an additional $300 million
for budgetary support this year.
The NBS defied market expectations last Tuesday by leaving its
key policy rate on hold at 14%.
Jelasic said monetary policy would be eased gradually since
inflation is expected to hit 9% this year and in a bid to
anchor medium-term inflation expectations.
The crisis in the last 40 years has meant inflation has
gone up and in every crisis period in Serbias history,
there were high expectations by all economic agents that
inflation will go up, he said.
The speed and sequencing of interest rate cuts will take
consideration of the medium to long-term consequences.
Last month deputy prime minister Mladjan Dinkic called on the
central bank to cut rates to stimulate the economy, adding that
the government had run out of fiscal firepower.