VZCZCXRO1318
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK
RUEHYG
DE RUEHBW #1010 2521001
ZNR UUUUU ZZH
R 091000Z SEP 09
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC
INFO EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/USDOC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBW/AMEMBASSY BELGRADE

UNCLAS BELGRADE 001010 
 
SENSITIVE 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EINV ETRD EFIN SR
SUBJECT: SERBIA AND IMF - DECISION POSTPONED ON SECOND TRANCHE 
 
REF: BELGRADE 912; BELGRADE 838 
 
Summary 
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¶1.  (SBU) The IMF and Serbia postponed on September 1 any decision regarding the disbursement of Serbia's second tranche of IMF funds until at least late October.   The IMF expects that this delay will give the government time to prepare its proposed 2010 budget and to show how Serbia intends to implement drastic public sector reform.  In the interim, the IMF agreed to Serbia's request to raise its 2009 fiscal deficit to 4.5% of GDP and not to raise taxes in the short term.  Serbia will also be able to draw upon $500 million in Special Drawing Rights from the IMF, which will likely be used for budget support.  By postponing 
to October, however, the burden falls to Serbia to show that its economy is rebounding and that it is serious about undertaking reform.  Not reaching an agreement later this year could have larger implications.  End Summary. 
 
Sides Agree to Postpone Second Tranche 
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¶2.  (SBU) Following a week of negotiations in Belgrade, the visiting IMF team and the Serbian government announced on September 1 that a decision on Serbia's 
second tranche had been postponed until late October, at the earliest.  IMF team leader Albert Jaeger said at a joint press conference with Serbian government that the second review of the existing $4 billion Stand-By Arrangement with Serbia had not been completed, but was postponed instead until the IMF's next visit, likely in late October.  As a result, the funds for the second tranche ($850 million) of Serbia's $4 billion IMF package were not released.  Jaeger told the media that the key concern was whether the government would be able to significantly cut its projected 2010 budget deficit from the expected 5.5% of GDP to an acceptable 3.5%.  Jaeger said the IMF had agreed to Serbia's request to expand the 2009 budget deficit to 4.5% from the originally agreed upon 3%.  In talks with the IMF, Serbia insisted it could meet this budget target solely by cutting public expenditure, while refusing the IMF recommendation to also raise public revenues by increasing the VAT rate.  Jaeger said that "more time was needed for the government to elaborate a strategy" of public sector reforms and that "the IMF would need to see credible and concrete plans and actions to make sure that fiscal side was back on track."  Jaeger said the IMF would expect to see a 2010 budget draft from the government before the IMF returned later this year. 
 
¶3.  (SBU) GoS representatives were more optimistic in their review of the IMF visit.  Mladjan Dinkic, Deputy Prime Minister and Minister of Economy and Regional Development, and Finance Minister Diana Dragutinovic told the media that the IMF meetings were successful, claiming that the two sides had "reached a deal 
to postpone."  National Bank of Serbia Governor Radovan Jelasic was much less enthusiastic about the state of talks.  Local media headlines, however, focused 
on the lack of an agreement.  The Prime Minister's Economic Advisor, Tatjana Isakovic told us on September 3 that the government was pleased with the talks, but acknowledged the GoS had a lot of work to do over the next few weeks to present a realistic budget to the IMF.  Stojan Stamenkovic of the Belgrade Economic Institute and a participant in the negotiations, told journalists on September 8 that "talks were conducted in a conciliatory and friendly tone," but he expected October talks "would be much more difficult" since the IMF would firmly insist on a VAT increase. 
 
IMF: Serbia Had the Chance to Get the Deal 
--------------------------------------------- 
 
¶4. (SBU) IMF Resident Representative in Belgrade, Bogdan Lissovolik, told us on September 3 that Serbia "had an opportunity to get the deal done" in August if the GoS had been willing to consider some common ground.  Lissovolik said that Jaeger had been ready to accept whatever expenditure reduction measures the government proposed as long as the GoS was willing to consider a VAT increase as 
a contingency plan.  However, Lissovolik said that the Serbian government was unwilling to consider a VAT hike under any circumstance.  (Serbia's current VAT 
is 18%.) Lissovolik said the GoS's proposed measures of freezing pensions and public wages, nominally freezing public expenditures, and cutting the number of 
public employees "did not add up."  Lissovolik said there were also many uncertain variables since many of the proposed cuts would be on the municipal level. 
 Lissovolik said any payoffs from reducing the public sector would only benefit Serbia in the medium term.  He concluded that to date, Serbia's proposed measures to bridge the fiscal gap were of "low quality and very uncertain."  He remained cautiously optimistic that a deal could still be reached later in the year, but acknowledged it would take strong will and leadership by the GoS to enforce such cuts in public spending. 
 
In the Interim:  Special Drawing Rights 
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¶5.  In the interim period, Serbia will be able to access an additional $500 million in funding, through its Special Drawing Rights with the IMF (ref A).  This funding, which was now available to all IMF members, had fewer strings and a lower interest rate than Serbia's IMF package, Lissovolik told us.  As a result, Lissovolik said the GoS would likely draw on these funds for immediate budget 
support. 
 
Vienna Agreement Cancelled if Next Revision Fails 
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6.(SBU) Despite failing to reach agreement with the IMF, Serbia's monetary policy remains stable and commercial banks have maintained their exposure in Serbia in accordance with the Vienna Agreement signed in April (ref B).  Lissovolik told us, however, that if the IMF and Serbia did not reach an agreement during the next IMF visit, foreign commercial banks would no longer be obliged to fulfill the Vienna Agreement and could reduce their exposure in Serbia, including public securities purchases.  Lissovolik thought this would provide an additional incentive for the GoS to reach an agreement with the IMF on the next visit. 
 
COMMENT 
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¶7. (SBU) Despite government efforts to portray the IMF postponement in a positive light, the delay effectively shows the government's inability to draft a comprehensive proposal to address the economic crisis.  The IMF has given Serbia a reprieve of a couple of months to find the political strength to put its fiscal house in order.  In the interim, Serbia's monetary policy remains stable with sufficient foreign currency reserves as a result of the IMF's first tranche. 
Serbia will have another chance with the IMF in late October/early November.  The GoS would be wise not to squander that opportunity.  End Comment. 
BRUSH