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RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK
RUEHYG
DE RUEHBW #1334/01 3201143
ZNR UUUUU ZZH
R 130756Z NOV 09
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0377
INFO EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/USDOC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 BELGRADE 001334 
 
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 REACH AGREEMENT 
 
REF: BELGRADE 1010; BELGRADE 1126 
 
BELGRADE 00001334  001.2 OF 002 
 
 
Summary 
------- 
 
¶1.  (SBU) On November 4, the Serbian government and the IMF reached 
agreement on the second review of the country's $4 billion Stand By 
Arrangement.  The IMF concluded that Serbia had met most of the 
economic targets, except the fiscal deficit which they agreed to 
expand for 2009 to 4.5% of GDP and to 4% of GDP for 2010.  Serbia 
agreed to undertake reforms in the pension and public sector in early 
2010 in order to make up for the budget revenue shortfalls.  The 
Serbian government is satisfied with the deal, believing it will 
bring credibility and predictability to Serbia.  Ultimately, while 
still in decline, the Serbian economy has performed better than 
expected in 2009, which allowed the IMF more flexibility in its 
evaluation.  Serbia now must live up to its commitments and pass the 
expected reforms in early 2010.  End Summary. 
 
Second Review of the SBA Successfully Completed 
--------------------------------------------- -- 
 
¶2.  (SBU) Following the inconclusive August negotiations (ref A), the 
visiting IMF team and the Serbian government reached agreement on 
November 4 on the completion of the second review of the $4 billion 
Stand By Arrangement (SBA) with Serbia.  The agreement is now subject 
to approval by the IMF Executive Board scheduled for December 21 
provided that Serbia's Parliament adopts the 2010 budget before then. 
 After approval, Serbia will be able to draw on the second tranche of 
funds from the SBA "in amount compatible with its external financing 
needs," according to the IMF press release. 
 
IMF: SBA Has Worked Thus Far 
---------------------------- 
 
¶3.  (U) IMF team leader Albert Jaeger said on November 4 at a joint 
press conference with Serbian government officials that the SBA had 
helped Serbia to ease financial tensions, to contain output decline, 
and to face falling inflation while the large current account deficit 
was shrinking faster than anticipated.  In line with encouraging 
signs in the economy, the IMF revised Serbia's projected GDP decline 
in 2009 from -4% to -3%, and expected modest GDP growth in 2010 of 
1.5%. 
 
Fiscal Policies Remain Key 
-------------------------- 
 
¶4.  (U) According to Jaeger, Serbia had met most of the program's 
targets, except the fiscal deficit, which Serbia exceeded due to 
revenue shortfalls.  Ultimately Serbia and the IMF agreed to a 4.5% 
of GDP fiscal deficit for 2009 and a 4% deficit for 2010.  Jaeger 
said the review focused on future budgets and fiscal policies. 
Serbia's main problem was the continued decline in budget revenues 
coupled with the need for capital investments to improve ailing 
infrastructure.  Together this created an unsustainable fiscal 
deficit for the years to come, Jaeger said.  As a result, Jaeger said 
the IMF and Serbia had agreed to adjustments on the expenditure side, 
via freezing in pensions and public salaries throughout 2009 and 
¶2010.  Serbia also promised additional wage and pension reforms 
beginning in 2010.  All of this would be done without an increase in 
taxes, as the Serbian government had insisted. 
 
Government Gives Details of the Agreement 
------------------------------------------ 
 
¶5.  (SBU) At the press conference Finance Minister Diana Dragutinovic 
presented the 2010 draft budget figures blessed by the IMF showing 
revenues of $10.23 billion, expenditures of $11.87 billion, and a 
deficit of 4% of GDP $1.64 billion.  National Bank of Serbia (NBS) 
Governor Radovan Jelasic told the media on November 5 that Serbia had 
agreed to cut the share of pensions in GDP from the current 13% to 
10% by 2015, and to cut the share of public wages in GDP from the 
current 10% to 8% by 2015.  Deputy Prime Minister Jovan Krkobabic of 
the Pensioner's Party (PUPS) stated that negotiations were tough, but 
agreed that the pension system reform proposal would be ready by the 
end of February 2010. 
 
Economic Outlook Improving and Comparatively Good 
--------------------------------------------- ---- 
 
¶6.  (SBU) The IMF's Resident Representative Bogdan Lissovolik told us 
on November 6 that the IMF had been encouraged by signs of Serbia's 
potential recovery, but acknowledged that the country "was not out of 
the woods yet."  Lissovolik said Serbia's deficit of 4.5% looked 
 
BELGRADE 00001334  002.2 OF 002 
 
 
reasonable, compared to the higher figures in places such as the 
Baltic economies.  For Serbia, the IMF also favorably considered 
expected future investments, particularly those related to Corridor 
10 (ref B) and the expected expansion of Fiat's operations, which 
would improve Serbia's export potential.  The IMF was also satisfied 
with Serbia's efforts to line up additional bilateral lending with 
China and Russia as long as they were provided at a concessional 
rate, Lissovolik said.  Ultimately, the IMF gauged that Serbia 
currently had a favorable political environment which would permit 
the proposed reform legislation to go forward and which allowed the 
IMF to sign off on the next tranche, Lissovolik said.  He noted, 
however, that the IMF team would return in February 2010 to make 
certain Serbia was still on track. 
 
Figures In Line with IMF Optimism: Modest Recovery 
--------------------------------------------- ----- 
 
¶7.  (U) Current statistics support the IMF's optimism.  Although 
overall industrial production had decreased by 15% in 
January-September 2009 y/y, the decline stopped in August, and Serbia 
had a modest recovery of 3.1% in September.  The increase came mostly 
from the processing industry: U.S. Steel production, chemicals 
(especially pharmaceuticals), oil derivatives, and food processing. 
The drop in domestic demand in Q1-Q3 2009 caused by the wage freeze, 
global crisis and slowdown in the economy, resulted in significant 
shrinking of Serbia's trade deficit by 44.5% y/y to only $5.13 
billion.  Consequently, the projected 2009 current account deficit 
dropped to only 7% of GDP, compared to 17.4% in 2008, according to 
NBS data.  Serbia's hard currency reserves reached $15.62 billion at 
the end of September 2009, capable of covering an estimated nine 
months of imports.  Inflation estimates have also been revised down 
and is now only expected to reach 7.7% for 2009. 
 
IMF Funds May Not Be Needed 
--------------------------- 
 
¶8.  (U) The better-than-expected performance of Serbia's economy has 
changed the dynamics of the IMF program, Jaeger said, and instead of 
aggressive withdrawal, the IMF would disburse the remaining $3.2 
billion to Serbia more evenly.  Deputy Prime Minister Mladjen Dinkic 
said on November 5, that Serbia would not withdraw any of the 
remaining funds from the existing SBA, since Serbia has sufficient 
currency reserves.  NBS Governor Jelasic was more cautious about 
whether or not Serbia would call upon the additional tranche.  Stojan 
Stamenkovic of the Economic Institute told us on November 10 that 
Dinkic's statement was "rubbish, and cheap political points," stating 
that of course Serbia needed the IMF funds. 
 
COMMENT 
------- 
 
¶9. (SBU) The second tranche agreement with the IMF is good news for 
Serbia, as it tries to recover from the economic crisis and present 
itself as viable, stable destination for foreign direct investment. 
Rather than a bill of clean health, the IMF's approval is more a 
signal that the situation in Serbia is less dire than elsewhere in 
the region.  Hard work still needs to be done to reform Serbia's 
public sector and pension systems.  The IMF will expect initial 
delivery of those reforms in early 2010. 
End Comment. 
BRUSH