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The Government of the Republic of Serbia

In the service of citizens

Government, IMF reach agreement on stand-by arrangement

Belgrade, 14 November 2008

Minister of Finance Diana Dragutinovic today stated that the government has reached a pre-emptive agreement with the International Monetary Fund (IMF) on a 15-month stand-by arrangement to support the government’s economic policy and thus preserve macroeconomic and financial stability.

Albert Jagger, Diana Dragutinovic and Radovan Jelasic

Dragutinovic told a press conference that the programme has been negotiated for over the past two weeks and it gives Serbia an opportunity to use the funds only if it actually needs them, adding that Serbia will try to do without them.

She noted that the arrangement will provide Serbia with greater flexibility in case it has to mitigate the impact of the global financial crisis, adding that it will also help to boost investors and international institutions’ trust in Serbia.

According to her, a policy of frugality will be implemented at all levels next year, starting from the state and municipalities to public companies all the way down to all budget beneficiaries.

Dragutinovic noted that the 2009 budget deficit will be 1.5% of GDP at the most and will not be a result of an expansive fiscal policy, but of slower-paced economic activities.

The total volume of salaries and pensions next year will increase in comparison with 2008, but the growth will be a moderate one, emphasised the Minister, announcing that subsidies in 2009 will be considerably lower, however enough room will be left for the state to react and ensure proper market functioning.

She said that the increase in the salary supply in 2009 should be 8% and that of the pension supply 15%, which can however be revised if the economic situation becomes more favourable than currently projected.

Dragutinovic stressed that various combinations are possible as only the overall volume of the fund has been agreed upon.

We will be able to discuss whether all earnings will be fixed and if there is room for a stronger social policy in line with inflation, said the Minister, adding that the government will discuss the 2009 budget next week.

According to her, a strict policy on contributions will be carried out at all state levels, including public companies.

She recalled that the level of subsidies and their proportion of Serbia’s GDP is over 2.5%, whereas in developed countries it stands at less than 1%, adding that subsidies will be reduced through better control of funds.

Furthermore, the transformation of the economy will be completed, which will also cut down on subsidies, said the Minister, adding that subsidies to all public companies, primarily the railway company Zeleznice Srbije will be reduced, as well as subsidies at the local level, i.e. to utility companies and agriculture.

Head of the IMF mission Albert Jagger said that the IMF reached agreement with Serbian government representatives on a $520 million loan support, which Serbia will make use of only if necessary.

Jagger said that the arrangement will last until March 2010, adding that the credit line will have to be approved by the IMF Executive Board and adopted by the Serbian government.

According to him, the Serbian economy can deal with the global crisis but will inevitable face problems which will render it more vulnerable than other countries in the region, these are a high deficit and certain structural issues, such as its large public sector.

Governor of the National Bank of Serbia (NBS) Radovan Jelasic announced that the government and the NBS will sign a Memorandum of Understanding specifying the distribution of responsibility in achieving targeted inflation rates in 2009.

Jelasic said the NBS’s monetary policy will be consistent, adding that in order to increase saving the bank will not grant loans to the public sector and will intervene only to help overcome domestic or external shocks.

He announced that the NBS will initiate amendments to the Law on the National Bank of Serbia to define the ban on loans to the public sector, the recapitalisation of the NBS and further strengthening of the bank’s independence.

The Governor said that a strategy on the state’s share in banks will be adopted before March 2009.

Additional measures will be taken to help control the banking sector, particularly its liquidity and foreign currency status.

He said that he reached agreement with the four largest banks in Serbia on measures to alleviate the impact of the crisis, noting that these banks are Intesa, Raiffeisen, Hippo Alpe-Adria Bank and Komercijalna Banka and voiced hope that other banks will follow suit.

He said they also agreed that these banks offer citizens the possibility to have their Swiss franc-indexed loans transformed into euro-indexed loans free-of-charge, adding he expects citizens to use this benefit primarily for mortgage loans.

Apart from that, it was also agreed that the banks prolong the repayment period for all ongoing loans, without additional fees, except for housing loans, added the Governor.