VZCZCXRO2027
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBW #1262/01 3441526
ZNR UUUUU ZZH
R 091526Z DEC 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0721
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPARTMENT OF COMMERCE WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 001262 
 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EINV ETRD EFIN SR
SUBJECT: SERBIA: GOVERNMENT ADOPTS 2009 BUDGET DRAFT 
 
Ref: A) Belgrade 1222   B) Belgrade 1158 
 
SUMMARY 
------- 
 
¶1.  On Saturday, December 6, the Serbian government adopted its 2009 
budget proposal and forwarded it to the Parliament after delays due 
to disputes among ministers over resources.  The government managed 
to meet the IMF deadline - the December 19 IMF Board vote on the 
Stand-By Arrangement with Serbia - and agreed to a consolidated 
deficit of 1.5% of GDP.  Despite a nominal increase in expenditures 
of 7.5% over the rebalanced 2008 budget, the draft budget cut public 
consumption's share of GDP from 45% to 43%.  The Finance Minister 
said the draft was a "rigorous" cut in public consumption, while 
experts' opinions varied.  The key test will be whether the economy 
achieves the assumed 3.5% growth in 2009 and inflation is kept at 
8%.  End Summary. 
 
Expenditures Up by 7.5%, But Share in GDP Down by 2% 
--------------------------------------------- ------ 
 
¶2.  The Serbian Government finally adopted a draft 2009 budget on 
Saturday, December 6, after several postponements following disputes 
among ministers over appropriations, and sent it to the Parliament 
for urgent adoption.  The budget projected revenues of $10.38 
billion, expenditures of $11.12 billion, and a deficit of $737 
million.  Although projected 2009 expenditures and revenues were 
both up by 7.5% nominally over the rebalanced 2008 budget, the share 
of public consumption in GDP was projected to decrease by 2% to 43% 
of GDP.  Also, despite a nominal increase in the budget deficit of 
8%, the consolidated deficit as a percentage of GDP was projected to 
decrease from 2% to 1.5%. 
 
Basics: Growth 3.5%, Inflation 8%, EU Interim Agreement 
--------------------------------------------- - 
 
¶3.  According to Finance Minister Dragutinovic the budget projected 
that the worldwide crisis would hit Serbia in 2009 and although "it 
is not possible to predict all effects on Serbian economy" the 
assumptions included a slow down in GDP growth in 2009 to 3.5%, 
inflation of 8%, export and import drops of 4.8% and 5.4% 
respectively, and a current account deficit of 16% of GDP.  The 
proposed budget included: implementation of the Interim Trade 
Agreement with the EU, cutting import duties on automobiles by half, 
and government investment in the joint venture with Fiat of around 
$254 million.  The budget included implementation of the EU Interim 
Trade Agreement after intervention by Economy and Regional 
Development Minister Dinkic.  Implementing the Interim Trade 
Agreement added to the fall in customs revenues as the trade 
agreement reduced import tariffs on a broad range of goods.  To 
compensate the government will hit Serbians pocketbooks with 
increases in excise taxes on those things most dear to the average 
Serbian cigarettes, coffee and beer, and an increase in car 
registration fees.  Excise taxes will also increase on oil 
derivatives (gasoline and diesel). 
 
Cuts in Subsidies, Increase in Pension Transfers 
--------------------------------------------- --- 
 
¶4.  Dragutinovic explained that public sector wages would increase 
at the same rate as inflation while pensions would remain at 
December 2008 levels (after the controversial 10% extraordinary 
increase given in September).  Major cuts were made in subsides to 
utilities, agriculture, railways, and socially-owned companies from 
$720 million to $609 million, capital expenditures from $876 million 
to $594 million.  On the other hand, budget transfers to social 
insurance organizations (the Pension Fund, Health Fund and 
Unemployed Fund) would increase by 30% from $2.66 billion) to $3.46 
billion thus increase its share in total budget expenditures from 
25.7% in 2008 to 31.2% in 2009.  Added to wages and social 
allowances, these transfers accounted for 70% of the budget. 
 
Deficit Covered by Sale of NIS and New Borrowing 
--------------------------------------------- --- 
 
¶5.  The government proposed to cover the budget deficit of $737 
million together with debt repayment of $636 million from 
privatization revenues of $742 million, including revenues from the 
sale of state oil firm NIS (ref A) and new borrowing of $301 
million. 
 
Finance Minister Satisfied, Experts Opinion Vary 
--------------------------------------------- --- 
 
¶6.  Finance Minister Dragutinovic stated at a December 6 press 
conference that she was satisfied since the budget reflects 
responsible state behavior and was extremely restrictive. 
Economists' evaluations of the restrictiveness of the budget varied 
significantly.  Some praised the governments' attempts to restrict 
spending growth, while others cautioned that the economic 
 
BELGRADE 00001262  002 OF 002 
 
 
assumptions in the budget were optimistic. 
 
COMMENT 
------- 
 
¶7.  The Serbian government managed to adopt a budget proposal that 
is at least nominally in line with IMF requirements.  The pressure 
of the IMF Stand-By Arrangement helped to focus politicians on the 
difficult economic environment as some in the government had hoped. 
At the same time, the internal battles and delays that postponed the 
government meeting to adopt the budget highlighted the political 
horse-trading required to bring the government's wide-ranging 
coalition partners on board.  Although the opposition parties 
announced they would vote against the budget in Parliament, the 
government should now have the votes to pass it.  The real challenge 
is only just beginning, as Serbia will implement a fiscally 
conservative budget in the midst of the worldwide financial crisis 
with the hopes of attracting sufficient international investment to 
keep growth numbers at least barely positive.  End Comment. 
 
MUNTER