VZCZCXYZ0005
RR RUEHWEB

DE RUEHBW #0096/01 0192236
ZNR UUUUU ZZH
R 191706Z JAN 10
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0625
INFO EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS BELGRADE 000096 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV EFIN ECON EINV SR
SUBJECT: SERBIA: BLAME GAME BETWEEN THE GOVERNMENT AND CENTRAL BANK 
ON DINAR DEPRECIATION 
 
SUMMARY 
 
------- 
 
 
 
¶1. (SBU) Serbia's National Bank (NBS) Governor has been severely 
criticized over the relatively mild 3% depreciation of the Serbian 
dinar since the end of November 2009.  The criticism, coming from 
both businesses and government officials, including most recently 
the Prime Minister, has fueled further speculation regarding the 
strength of the dinar and the ability of the NBS and Government to 
harmonize an effective monetary policy.  End Summary. 
 
 
 
Prime Minister Blames NBS 
 
------------------------- 
 
 
 
¶2.  (U) Prime Minister Cvetkovic publicly criticized NBS Governor 
Radovan Jelasic on January 13, stating that the NBS should be held 
responsible for the weakening of the dinar and claiming that state 
policies and actions had in no way influenced the dinar's 
depreciation.  Cvetkovic said the NBS should have predicted the 
increased demand for euros to pay end of year obligations and 
should have stabilized the dinar via stronger and timelier 
interventions. "I expect that the NBS, as an independent 
institution as well as the Government's partner in creating 
economic policies, would consistently implement monetary policy 
goals, and that NBS representatives would not throw responsibility 
for their own flaws on the Government," Cvetkovic said. 
 
 
 
The Dinar's Slide 
 
----------------- 
 
 
 
¶3.  (SBU) Since late November 2009, Serbia's dinar has depreciated 
3%.  The dinar's slide from 94.44 dinars to the euro on November 
25, 2009 to 97.33 dinars/euro on January 14, 2010 leaves it 
perilously close to the psychological and politically charged 
barrier of 100 dinars/euro.  Following the signing of the $4 
billion IMF package with Serbia in May 2009, the dinar had been 
strengthening against Euro.  This strengthening slowed and then 
began to slide in September 2009.  The drop, however, became more 
severe in late November 2009.  The NBS, which had not entered the 
forex market since February 2009, intervened in December 2009 and 
January 2010, selling a total of 170 million euros ($233 million)to 
prop up the dinar.  As of January 14, the NBS still had a record 
amount of currency reserves, totaling $15.1 billion. 
 
 
 
Business Sector's Fury 
 
---------------------- 
 
 
 
¶4.  (SBU) In November and December 2009, Serbian business leaders 
also accused Jelasic of ruining corporate profits by permitting the 
dinar to depreciate and not intervening more aggressively in the 
forex market.  In early December  2009, the Serbian Chamber of 
Commerce and Serbia's elite business leaders' Privrednik Club 
complained publicly that business profits had been badly hurt by 
the weakening dinar's impact on dinar-denominated invoices and on 
businesses' Euro-denominated obligations toward banks.  The 
business groups urged the NBS to more aggressively use its currency 
reserves to defend the exchange rate and to provide a "stable 
currency". 
 
 
 
¶5.  (SBU) Governor Jelasic responded to business sector complaints 
that because the dinar floated freely rather than being fixed, 
fluctuations were to be expected.  Frustrated over the attacks, 
Jelasic told us on December 15 that he would not fulfill anybody's 
 
 
wishes on setting a specific exchange rate level.  After Jelasic 
initially refused to meet with them, businessmen finally met with 
Prime Minister Cvetkovic and Governor Jelasic on December 22, 2009, 
to discuss the exchange rate and to attempt to soothe growing 
tensions.  However, on January 13, 2010 the President of Belgrade's 
Chamber of Commerce, Milan Jankovic, blamed Governor Jelasic not 
only for the depreciation but also for Serbia having "the highest 
inflation in the region, the highest main interest rate, the most 
expensive loans, the lowest exports, and the most profitable 
banks," whom he accused of solely purchasing NBS securities rather 
than providing real investment. 
 
 
 
NBS Governor: Blame the Government 
 
----------------------------------- 
 
 
 
¶6.  (SBU) On January 5, Jelasic accused the government of a "rapid 
increase in spending that exerted pressure on the exchange rate." 
He said the government's decision to sell some of the $600 million 
in IMF special assistance funds in December 2009 to finance the 
deficit had caused the devaluation, because the GOS had to expand 
the dinar monetary supply to complete the exchange, thus pumping 
additional dinars into the economy.  Jelasic said on January 15 
that the amount of funds was itself not the problem, but rather the 
speed with which this was done by the government. 
 
 
 
The Government Strikes Back 
 
--------------------------- 
 
 
 
¶7.  (SBU) On January 11, Finance Minister Diana Dragutinovic 
rejected the Governor's blame, claiming that the exchange rate 
slide had started in October and that Serbia's 2009 deficit was 
actually lower than projections ($1.39 billion versus the projected 
$1.57 billion).  Belgrade Mayor and Democratic Party Vice President 
Dragan Djilas also rejected government responsibility for the dinar 
on January 12, claiming that the NBS was to blame.  Djilas said the 
city's budget had suffered a $43.5 million loss in just one month 
due to the dinar's fall.  Governor Jelasic responded on January 13 
that politicians should not deal with the "serious business" of 
monetary policy and stressed that price stability was in the 
interest of NBS.  Jelasic's comments then prompted PM Cvetkovic's 
strongly worded January 13 statement. 
 
 
 
Cooperation Needed Instead of Accusations 
 
----------------------------------------- 
 
 
 
¶8.  (U) Stojan Stamenkovic, an economist with Belgrade's Economic 
Institute, said on January 12 that the government and the NBS 
should harmonize their actions instead of accusing one another. 
The drop in the dinar was caused by bad timing of the actions of 
both, he said.  On December 29, the NBS decreased both hard 
currency reserve requirements and the benchmark interest rate from 
10% to 9.5%, thus decreasing the attractiveness of the dinar. 
Simultaneously, the Government had pumped in dinars (from IMF and 
EU assistance funds) to meet not only regular expenses but also to 
pay Serbian citizens almost $119 million in free shares of the 
state-owned oil company, NIS.  All of this had contributed to the 
dinar's depreciation, Stamenkovic said.  In addition, the clash 
between NBS and the Government over the exchange rate had created 
negative expectations which increased pressure on the exchange 
rate.  Media speculated that the public feud could be an attempt to 
replace Jelasic as NBS Governor, further fueling concerns about the 
dinar's stability. 
 
 
 
Comment 
 
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¶9.  (SBU) While Governor Jelasic claims that that value of the 
dinar is market determined, the shallow market for dinars makes 
effective coordination between NBS and the government essential. 
The Serbian exchange market is so shallow that a purchase of just 
$30 million can significantly shake the exchange rate and public 
confidence.  To date, NBS's monetary policy has helped to keep the 
financial sector stable through the economic crisis; however, the 
NBS and the GoS have consistently failed to harmonize fiscal and 
monetary policy.  Jelasic has come under pressure in the past, but 
the public criticism from the highest levels of government has 
raised the natural tension between the NBS and the government to 
new highs.  If the NBS and GoS cannot put their public feud aside 
and improve their coordination the Serbian economy, Serbian 
companies and the Serbian people will suffer.  End Comment. 
PEDERSON