This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 BELGRADE 000188 
 
SIPDIS 
 
OC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: EFIN ECON SR MW
SUBJECT: GOS DECLARES IMF VICTORY, LOOKS TO PARIS CLUB 
 
¶1. (U) SUMMARY: The GOS economic team jointly declared 
victory in completing the final review of its IMF program on 
February 6 and invited Paris Club action on implementing the 
final tranche of debt reduction before the next payment falls 
due.  Finance Minister Dinkic also announced an ambitious 
plan to use the projected budget surplus of 2.6 percent of 
GDP for 2006 to cut employers' payroll contributions from 73 
cents on the dollar to 60.  The borrowing capacity released 
by the Paris Club debt reduction - and an expected reduction 
from Kosovo negotiations - should be used to borrow USD 800 
million for road construction, primarily in Southern Serbia, 
Dinkic said.  Serbia wants a follow-on IMF agreement, the 
finance minister asserted, but it must await the outcome of 
the Montenegro referendum.  With Governor Jelasic seated to 
his right, Dinkic also defended the central bank against the 
recent scandal that has put the vice governor for the banking 
sector behind bars, and he proposed a purge of judges to 
fight corruption. end summary. 
 
¶2.  (U)Finance Minister Dinkic, National Bank of Serbia 
Governor Jelasic and Minister of Economy Bubalo made a joint 
presentation to the diplomatic corps on February 8 at which 
they painted a bright picture of Serbia's economic outlook. 
Dinkic noted that growth over the last two years, if the 2005 
number comes in as expected, will have averaged 8 percent. 
The consolidated budget surplus should hit 2.6 percent for 
2006, he said, largely on the basis of a cut in 40,000 public 
sector jobs (half in state-owned companies).  And Serbia 
should capitalize on its budget surplus to cut payroll 
contributions for pensions, health and other items from 70 
cents on the dollar to 63 cents, Dinkic argued, thereby 
making Serbia more attractive to foreign investors. 
 
¶3.  (U)Foreign direct investment in 2005 was USD 1.481 
billion, up 53 percent over 2004 and Serbia's best year yet. 
Exports were the government's main task now, the finance 
minister said, and the increase of 29 percent for 2005 was 
largely driven by multinational companies, underlining the 
importance of FDI, he noted.  The strong export performance 
also contributed to the sharp decline in the current account 
deficit, from 13.7 percent of GDP to about 9 percent in 2005. 
 
¶4.  (U)Another reflection of Serbia's brightening outlook is 
the rapid reduction in public debt, from 169 percent of GDP 
in 2000 to 44.5 percent in 2006, including the expected write- 
off of the last 15 percentage points of Paris Club debt. 
Dinkic pointed out that a further write-off of USD 1.1 
billion related to Kosovo - a development he expects as part 
of upcoming status negotiations - will reduce public debt to 
40 percent.  Although that level still would mark Serbia as a 
country of medium indebtedness, Dinkic said, public finances 
would be strong enough to support an additional USD 800 
million in borrowing to finance the completion of four-lane 
highways in Corridor 10 of Southern Serbia.  And Serbia's 
improved financial status was recognized this week by the 
World Bank's decision to make Serbia eligible for standard 
Bank lending. (Note:  Serbia no longer qualifies for 
concessional lending from the World Bank.) Dinkic also called 
on the OECD to reassess Serbia's credit rating. 
 
¶5.  (U)Inflation remains the dark cloud on Serbia's economic 
horizon.  Dinkic said that a tight incomes policy would help 
to bring inflation down to single digits in 2006, from 17.7 
percent in 2005, although many analysts believe this will be 
difficult.  The finance minister turned over the discussion 
to Jelasic, who had been his deputy when Dinkic was central 
bank governor. 
 
¶6.   (U)Jelasic immediately reminded the audience that the 
IMF prescription for curbing inflation includes faster 
restructuring of the economy, to improve its supply response, 
as well as fiscal and monetary restraint.  Bringing inflation 
down to single digits would not be easy, he said.  However, 
the governor returned to the good news theme by announcing 
that the National Bank's official reserves have reached USD 6 
billion, enough to cover six months of imports.  The exchange 
rate has been stable.  (Note:  One questioner observed that 
dinar actually appreciated against the Euro in 2005.) 
 
¶7.  (U)The NBS governor cited, with relish, the dramatic 
increase in savings, from EURO 1.4 billion at end-2004 to 
EURO 2.2 billion in 2005. This, in turn, had allowed a rapid 
increase in lending based on domestic funding, as opposed to 
external sources.  Lending was up 65 percent in 2005, to EUR 
5.3 billion. (Note:  Almost all savings and lending are in 
Euro, an issue highlighted by the IMF's sixth review report, 
which pointed to the growing foreign exchange risk in bank 
lending to companies and consumers that earn in dinar.) 
 
¶8.  (U)The discussion turned interesting as diplomats 
questioned the Serbian economic team.  Dinkic said that 
Serbia wants a one-year precautionary IMF arrangement, in 
part to drive further reform   However, he said Montenegro 
was against any new deal before the independence referendum, 
so talks must wait.  (Note:  Jelasic did not address this 
issue at the presentation, but he has been more forward- 
leaning, urging Serbia to at least start talks with the IMF 
now, in part because rating agencies expect a new agreement.) 
 
¶9.  (U)A Finnish official queried Dinkic on corruption, and 
the finance minister used the opportunity to defend the 
central bank in the recent scandal involving a sting 
operation that put the vice governor for banking regulation 
behind bars.  He accused Israeli investors who bought a 
borderline Serbian bank of using "big pressure" - the 
corruption scandal - when the central bank withdrew the 
bank's license.  But the pressure would not work, Dinkic 
said, because it was simply not possible for the National 
Bank to reverse such a regulatory action.  (Note:  A lawyer 
for the Israeli investors has claimed that Jelasic solicited 
a Euro 2 million bribe to restore the bank's license, leading 
to the sting that snared the vice governor.) 
 
¶10.  (U)The government campaign against Milosevic-era tycoon 
Bogoljub Karic should be seen as an attempt to make all equal 
before the law, Dinkic said.  And corruption pervades the 
courts, Dinkic said, which are independent of the government 
but not independent of certain businessmen. (Dinkic did not 
refer explicitly to the courts' repeated decisions in favor 
of Karic's Astra Banka when the National Bank had revoked its 
license.)  The finance minister said he would propose to the 
government that all judges be "re-elected," allowing the 
removal of those found to be unacceptable. 
 
Moore