VZCZCXYZ0003
RR RUEHWEB

DE RUEHBW #0886/01 2421443
ZNR UUUUU ZZH
R 291443Z AUG 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0352
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC

UNCLAS BELGRADE 000886 
 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS:, SR, MW 
SUBJECT: SERBIA: POLITICAL PRESSURES DRIVE PENSION HIKE 
 
REF: BELGRADE 708 
 
Summary 
------- 
 
¶1.  On August 28 the Government of Serbia approved an extraordinary 
increase of pensions by 10% starting in October 2008.  Together with 
the regularly scheduled 7% pension increase the total increase in 
October will be 17%, with an additional $144 million cost to this 
year's budget.  The government supported this increase under 
pressure from the coalition partner Pensioners Party to address 
their demand to increase pensions up to 70% of the average salaries. 
 Analysts said that this move could have dangerous consequences for 
macroeconomic stability and the budget.  Economists, including USAID 
and World Bank advisors, recommended that the government develop a 
comprehensive pension reform plan, rather than making adjustments ad 
hoc to the pension system.  End Summary. 
 
Government Votes to Increase Pensions 
------------------------------------- 
 
¶2.  On August 28 the Serbian government approved an extraordinary 
increase if pensions of 10% starting in October 2008.  Together with 
the regularly scheduled six-month adjustment for salaries and 
inflation of 7%, the total increase in pensions this October will be 
17%.  Deputy Prime Minister Jovan Krkobabic (Pensioners Party, PUPS) 
said that this increase would require an additional $144 million in 
expenditures for 2008.  Krkobabic also said that this hike would 
push pensions up to the previous minimum of 60% of average salaries. 
 Krkobabic said the government should propose changes to the current 
pension law that would stipulate an additional increase of pensions 
up to 65% by mid 2009 and up to 70% of the average salaries in 
Serbia by the end of 2009. 
 
Analysts Highlight the Risks 
---------------------------- 
 
¶3.  Jurij Bajec from the Economic Institute told us on August 29 
that the Government would probably manage to cover the pension hike 
for this year but the real problem would be the new higher base for 
the next year.  According to Bajec, the main problem was a political 
promise to increase pensions up to 70% of the average salaries given 
to the Pensioners Party as a prerequisite to form the current 
government.  Bajec said that changes to the current pension law 
would open many questions that needed thorough analysis instead of 
ad hoc policy decisions.  He concluded that the current pension hike 
would be probably covered through sale of bonds and an increase in 
public debt. 
 
¶4.  Bajec's colleague Ivan Nikolic told us that the government had 
underestimated the cost of the 17% increase.  According to the 
Institute's estimates, just for the rest of 2008, the government 
would need $350 million to cover the increased pension costs. 
Nikolic said that additional government indebtedness was inevitable 
and he warned of slower growth and lower revenues if state 
investments suffered in the rebalanced budget. 
 
Finance Tries to Put the Best Face on the Increase 
--------------------------------------------- ----- 
 
¶5.  Janko Guzijan, State Secretary at the Ministy of Finance, said 
publicly following the government decision that the budget was 
"operating at its fiscal limits."  According to Guzijan, the pension 
hike would be covered through savings and additional revenues in the 
rebalanced budget, avoiding additional increases in public spending 
and budget deficit.  Guzijan said that the main problem was that the 
political promises made to form the coalition could be implemented 
in a four year mandate but not in a single year.  Vuk Djokovic, 
director of the respected Center for Advanced Economic Studies 
(CEVES), said that pensions counted for 13% of the current GDP. 
With the promised increase up to 70% of the average salaries, that 
share would jump to 17% of the GDP with a budget deficit of 5-6% of 
the GDP. 
 
Comment 
------- 
 
¶6.  The government was expected to adjust pensions upwards because 
of the promises to build the coalition.  However, it is not 
encouraging that this decision was taken without a clear strategy 
for pension reform and budget restraint.  Ironically, just this week 
a senior World Bank advisor on pensions was in Belgrade meeting with 
the government urging development of a comprehensive pension 
strategy.  USAID advisors have been working closely with Ministry of 
Finance officials to develop cost projections for comprehensive 
pension reform.  The Ministry understands the challenge Serbia 
faces, but the new Finance Minister has a difficult task to reign in 
the political forces seeking to pay off on campaign promises. 
 
¶7.  Ultimately, the important question of how the government 
calculates pension adjustments for inflation and wages in the future 
will determine how costly this 10% boost will be in the coming 
years.  Serbia had been moving to increase the weight of inflation 
over wages (which rise more quickly) in the calculation of regularly 
scheduled pension adjustments.  If Krkobabic succeeds in indexing 
pensions solely to wages the Serbian economy will pay a heavy price. 
 Serbian economic growth cannot continue at its recent strong pace 
with rising budget deficits and growing inflation.  The government's 
decision will increase macroeconomic pressures on the Serbian 
economy and make it even more important that the government rapidly 
accelerate the pace of privatizations and regulatory reform. 
Without government action to support economic (private sector) 
growth, and not just government spending, the Serbian economy will 
stumble in the coming months. End comment. 
 
MUNTER