VZCZCXRO1292
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBW #1175/01 3191449
ZNR UUUUU ZZH
R 141449Z NOV 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0634
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 001175 
 
SENSITIVE 
 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EINV ETRD EFIN SR
SUBJECT: SERBIA AND THE IMF REACH AGREEMENT ON A STAND-BY 
ARRANGMENT 
 
SUMMARY 
------- 
 
¶1.  (U) Serbian Government announced on November 14 an agreement 
with the IMF on a new 15-month $516 million Stand-By Arrangement. 
The Finance Minister highlighted that the arrangement was a stand-by 
arrangement and that Serbia would withdraw funds "only if needed." 
She also announced a cut in public spending by 1.5% of GDP for 2009, 
mostly though a cut in subsidies and "better management."  The IMF 
was not concerned about Serbia's financial situation in the short 
run due to "comfortable reserves and continued access to external 
financing," but characterized Serbia as vulnerable in the medium 
term due to the high current account deficit, weak export base, and 
low savings rate.  The new agreement provided flexibility to respond 
to shocks and increased investors' confidence, according to the 
Finance Minister.  END SUMMARY. 
 
Stand-By Agreement Signed 
------------------------- 
 
¶2.  (U) The Serbian Government and the IMF representatives announced 
at a joint press conference on November 14 that after prolonged 
two-week negotiations they had finally reached the agreement on a 
new 15-month Stand-By Arrangement (SBA).  The agreement was 
precautionary, since it only provided the option for Serbia to 
withdraw $516 million (75% of Serbia's IMF quota) if needed. 
Serbian authorities "do not intend to withdraw funds due to 
comfortable reserves and continued access to external financing," 
according to the IMF statement.  The agreement is subject to 
approval by IMF management and the Executive Board.  The IMF plans 
to bring the agreement to the Board on December 19, 2008. 
 
Finance Minister: Program Includes Broad Cuts 
--------------------------------------------- 
 
¶3.  (U) Finance Minister Dragutinovic said at the press conference 
that the program was the state's response to worldwide crisis. 
Program elements included savings on all levels of state spending - 
central government, municipalities, and mandatory social insurance 
funds - but only on current expenditures, while capital investments 
remained generous.  This required fiscal adjustment in 2009, with a 
decrease of 1.5% in public consumption to reach 44% of GDP or, in 
absolute terms, a decrease of around $740 million.  The fiscal 
deficit of 1.5% of GDP comes as a consequence of the slowdown in 
economic growth - revised to 3% in 2009 - and not as a consequence 
of expansionary fiscal policies.  If growth were 7%, as planned as 
late as August of this year, there would be no deficit, said 
Dragutinovic. 
 
Despite Savings, Pensions and Salaries Will Increase 
--------------------------------------------- ------- 
 
¶4.  (U) Dragutinovic said that the total budget for salaries and 
pensions would increase moderately in 2009, by 8% and 15% 
respectively.  Savings would be made in subsidies, which would go 
down significantly from the current level of over 2.5% of GDP to 
approximately 1% of GDP, mostly through cuts in the Development 
Fund, Transition Fund, agriculture subsidies, public companies 
(especially the railway), and local-level utility companies.  The 
Minister also announced stricter controls on expenditures, such as 
official travel and other non-recurring purchases, and promised to 
freeze those at 2008 level.  The government estimated that the 
current account deficit should fall from 18% of GDP in 2008 to 16% 
of GDP in 2009.  The IMF agreement was "preventive", provided 
greater flexibility to absorb possible shocks, and increased 
investors' confidence, according to Dragutinovic. 
 
IMF: Not Worried on Short Run, Vulnerable Beyond It 
--------------------------------------------- ------ 
 
¶5.  (U) According to the IMF press release, the program includes 
fiscal restraint - a fiscal deficit limited to 1.5% of GDP in 2009; 
monetary policy focused on restraining inflation; financial sector 
measures to maintain stability; and structural reforms to boost 
economic growth.  The IMF team leader reiterated that that this was 
not an emergency program, but rather a standard stand-by 
arrangement.  For the short term IMF was not too concerned: the 
banking system had high liquidity, the capital adequacy ratio was 
high, and short-term external debt was low.  However, in the 
mid-term Serbia was vulnerable due to the high current account 
deficit (Serbia spends $7.5 billion more than it earns every year),a 
weak export base, low savings rate, and structural problems of the 
oversized public sector. 
 
Governor Jelasic: Jointly to Control Inflation 
--------------------------------------------- - 
 
 
BELGRADE 00001175  002 OF 002 
 
 
¶6.  (U) National Bank of Serbia Governor Jelasic announced that NBS 
remained focused on low inflation and that NBS and the government 
would sign a memorandum of understanding in a joint effort to 
control inflation - using consumer price index targets, rather that 
the current core inflation targets that exclude most private-sector 
set prices.  The inflation target for 2009 would be 8%, plus or 
minus 2%.  The Governor also restated his desire to develop a 
dinar-based securities market in the medium term. 
 
COMMENT 
------- 
 
¶7.  (SBU) Several local bankers told us that the IMF agreement was a 
very positive development that would help stabilize the Serbian 
market in the short term.  The government faces a real challeng to 
spread the pain of spending cuts while keeping the governing 
coalition together.  Contacts in the Ministry of Finance and Deputy 
Prime Minister Djelic's office told us that the government had 
struggled to reach agreement on the budget deficit.  The government 
delayed its regular session to hammer out the final agreement, and 
the press and our contacts reported significant pressure from and on 
the Pensioners party.  It is still not completely clear what the 
Pensioners party accepted as part of the deal.  The IMF agreement 
gives the government an additional cushion to react to the global 
financial crisis, but without structural reforms and judicious 
fiscal policy in the coming year, Serbia could still become another 
victim in the financial downturn. 
 
MUNTER