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The Government of the Republic of Serbia

In the service of citizens

Serbia, IMF reach agreement to extend current three-year arrangement

Belgrade, 12 May 2005

Serbian Minister of Finance Mladjan Dinkic and National Bank of Serbia (NBS) Governor Radovan Jelasic said today that Serbia has reached an agreement with the International Monetary Fund (IMF) on an extension of the ongoing three-year financial arrangement.

Jelasic told a press conference that the decision has already been approved and that the IMF Board is expected to confirm it on Friday.

He said that an agreement was also reached on the fifth review under the current arrangement and that it should be approved by the IMF Board in late June this year as well as the sixth review that should be considered by the Board in the third or fourth quarter of 2005.

Dinkic welcomed the agreement with the IMF and explained that Serbia will get a loan tranche of $200 million for strengthening the NBS’s hard currency reserves if the IMF Board confirms the agreement.

According to Dinkic, the IMF team commended the Serbian government’s ambitious economic programme for 2005, which contains several key elements.

These elements, he explained, are further tightening of fiscal policy, speeding up of privatisation, and restructuring public sector enterprises with the aim completing privatisation in the country by the end of 2006.

According to him, the IMF also endorsed Serbia’s programme for public administration reform as well as a thorough overhaul of the pension system, due to be launched this fall.

The main objective of this programme is to create a basis for sustainable economic growth, said Dinkic and added that curbs in public spending will pave the way for more private as well as public investment.

Dinkic said that one of the goals is to cut the trade deficit through a 25 percent increase in exports this year. He added that trade figures in the first quarter of 2005 are very encouraging.

Dinkic reiterated that Serbia must curb inflation this year, as well as in the coming years, and to cut it down to the EU level. The objective, according to him, is to have a 4.5 percent inflation by 2008.

For the first time in the history of modern finance, Serbia will have a budget surplus at the end of 2005, which he said will reach an estimated 3.2 billion dinars, or 0.2 percent of the country’s GDP, said Dinkic.

According to him, this will be due to higher tax revenues after the launch of value added tax (VAT) given that budget receipts will exceed the projections by some 37 billion dinars. At the same time, outlays will be higher, as around 12 billion dinars will be set aside for pension this year, said Dinkic but added that some other costs will be reduced by some 10 billion dinars.

He said that Mayor of Belgrade Nenad Bogdanovic made a significant contribution to the success of talks with the IMF because he has decided that Belgrade should share the programme and economic goals of the Serbian government and post a 2.5 billion dinar surplus in the city budget this year.

Dinkic explained that Belgrade will assume the funding of the city’s railway infrastructure this year and thus help improve Serbia’s overall fiscal balance by some six billion dinars.

The consolidated public finance balance will have a surplus of some 12.2 billion dinars this year supported not only from Belgrade’s six billion dinars but also from around two billion dinars coming from municipalities across Serbia and one billion in the pension fund for the self-employed.

The surplus, according to Dinkic, will help to speed up the repayment of public debt, adding that around 5.5 billion will go towards settling a long-standing debt to road construction firms.

He announced that budget outlays in 2006 will be cut by a further one percent of the GDP in order to further curb public spending and create space for more investment.

Another key element of the government programme backed by the IMF is a thorough structural reform, said Dinkic and added that some 1,830 companies should go private by the end of 2006. He also announced that the government will call 14 tenders for the restructuring of socially-owned companies, adding that eight of them are already in the restructuring process.

He said that changes to the Law on Privatisation, due to be approved in parliament by the end of the month, will help to speed up the privatisation process. The changes, according to him, envision debt forgiveness for large companies.

Dinkic said that the changes will also speed up sell-outs of non-core businesses of public sector enterprises and he explained that these firms will be under the jurisdiction of the Privatisation Agency.

He said that 25 such spin-offs will be transferred to the agency by mid-June and that it will call a tender to pick a privatisation adviser for oil refineries in Pancevo and Novi Sad, currently operating as parts of state oil and gas company NIS.

Dinkic recalled that the government will soon adopt an action plan for the restructuring of mining complex RTB Bor and form special teams to help industrial revitalisation in Kragujevac, Bor, and Vranje.

He added that this year will also see the launch of pension system reforms, supported by the World Bank and targeted for completion in 2009, as well as the completion of public administration reforms and the modernisation of the health sector.