VZCZCXRO2484
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBW #0272/01 0861606
ZNR UUUUU ZZH
R 271606Z MAR 09
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 1122
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 000272 
 
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 NEW STAND-BY ARRANGMENT 
 
SUMMARY 
------- 
 
¶1.  (SBU) On March 26, the IMF and Serbia agreed to a 27-month, $4 
billion Stand-by Arrangement (SBA).  Fueled by the worsening global 
crisis, the arrangement replaces the precautionary SBA Serbia 
approved in January 2009.  As a part of the SBA, the IMF calls on 
Serbia to contain its 2009 fiscal deficit to 3% of GDP, cut 
expenditures, increase temporary revenues, and seek further funding 
from other International Financial Institutions (IFIs) and donors. 
In addition, foreign banks have been asked to provide assurances 
that their subsidiaries will remain well-capitalized in Serbia.  The 
new economic program mandated by the IMF will require Serbia to make 
substantial and meaningful cuts in expenditures that could face 
pushback in Parliament.  END SUMMARY. 
 
Serbia, IMF Reach $4 Billion Stand-By Arrangement 
--------------------------------------------- ---- 
 
¶2.  (U) On March 26, Finance Minister Dijana Dragutinovic, National 
Bank of Serbia Governor Jelasic, and IMF representatives announced 
at a joint press conference that Serbia and the IMF reached an 
agreement -- subject to IMF Executive Board approval -- on a $4 
billion, 27-month Stand-by Arrangement (SBA).  Serbia is to receive 
a total of $4 billion in 2009 and 2010, of which $3 billion 
available this year.  The new arrangement replaces a precautionary 
SBA approved in January 2009.  The enhanced SBA comes after new 
analysis of Serbia's growing economic difficulties amid the slowdown 
in foreign investment and external financing caused by the global 
economic crisis. 
 
IMF Calls On Serbia to Make Provisions 
--------------------------------------- 
 
¶3.  (U) IMF Mission Chief for Serbia Albert Jaeger explained that 
there were key provisions Serbia needed to take under the SBA. 
Serbia must revise its budget to contain this year's deficit to 3% 
of GDP.  Substantial cuts in recurrent expenditures, including a 
nominal freeze on public wages and pensions through 2010, must also 
be implemented.  Capital and social spending, however, would not be 
affected.  The IMF also called for increases in revenues which the 
Government announced would be achieved, in part, with a temporary 6% 
tax on salaries, personal income, and pensions above $170.  Serbia 
would also need to seek additional financial support from other IFIs 
and donors to fill its financial gaps.  In addition, the IMF asked 
for assurances from foreign banks that they would maintain their 
commitments to Serbia and that their Serbian subsidiaries would 
remain well-capitalized (i.e. not abandoned in Serbia).  Economy 
Minister Mladjan Dinkic said the Government was not happy about 
cutting consumption and increasing taxes, but that the situation 
would deteriorate further if the Government did not impose such 
measures. 
 
Governor Jelasic: The Most Significant Adjustment 
--------------------------------------------- ---- 
 
¶4.  (U) NBS Governor Jelasic hailed the proposed adjustments, saying 
they would mark a "crucial turnaround" for Serbia's fiscal policy. 
He added that the proscribed cuts in consumption would bring about 
real and positive results key to Serbia's agreements with commercial 
banks.  Jelasic said he believed that without the IMF deal, banks 
would likely reduce loans to Serbia which would lead to a drop in 
GDP and hard currency reserves, pressure on the dinar, and 
accelerated inflation.  So far, the NBS' monetary policy remains 
unchanged.  2009 target inflation is 6-10% despite new estimates 
that it will reach 8-12%. 
 
$1.4 Billion Fiscal Adjustment 
------------------------------ 
 
¶5.  (U) In a separate press conference on March 26, Prime Minister 
Mirko Cvetkovic said the budget deficit was growing quickly due to 
lower than expected revenues (total budget revenues are 2.5% lower 
nominally than in the first quarter 2008).  He estimated the budget 
deficit would reach $2.7 billion compared to the previously 
projected $700 million.  Cvetkovic said the Government planned to 
cover $1.4 billion of the $2.7 billion by cutting $1 billion in 
expenditures and raising $486 million in revenues.  The $1 billion 
expenditure reduction would come from freezing public sector wages 
and pensions, cutting federal transfers to municipalities, and 
slashing the Health Fund, among other reductions.  Revenue 
generation would come from a temporary 6% tax on all income above 
$170, an increase in property tax, and the introduction of taxes on 
a number of revenues and on luxury vehicles.  This would be the 
largest fiscal adjustment since 2000.  The fiscal adjustments will 
be reflected in a revised budget that is expected to go to 
Parliament in April.  The proposed tax changes will go to parliament 
the same day as revised budget for adoption. 
 
BELGRADE 00000272  002 OF 002 
 
 
 
Fewer Ministries? 
----------------- 
 
¶6.  (SBU) One of the immediate consequences of the tough budgetary 
cuts the IMF is demanding is a reported deal between Tadic's 
Democratic Party (DS) and Dinkic's G-17 Plus to cut the total number 
of ministries by five to ten, with DS, G-17 Plus, and Ivica Dacic's 
Socialist Party of Serbia (SPS) taking proportional losses.  Some 
observers believe that Tadic plans to use the excuse of budgetary 
constraints to get rid of problematic ministers, while others 
predict that cuts will never be implemented and are being discussed 
only as political theater to counterbalance the sacrifices that 
taxpayers will soon have to make.  (Details septel.) 
 
COMMENT 
------- 
¶7.  (SBU) The SBA calls for bold and substantial budgetary 
adjustments for the Serbian Government.  Such measures will surely 
spark debate and could be met with resistance in the Parliament. 
However, the sense of confidence, however little, the SBA would give 
to banks to maintain their credit level toward Serbia will likely 
persuade Parliamentarians to responsibly and quickly pass the SBA. 
End Comment 
 
MUNTER