Serbia is hoping to convince the International Monetary Fund its fiscal policies are prudent enough to secure another deal with the lender, a government official said on Monday. He was speaking shortly before the start of talks between the Belgrade authorities and the IMF which are due to last until August 30 and aimed at securing a precautionary arrangement worth one billion euros.
"We must prove our fiscal rules are feasible and that we are enforcing them. We are optimistic about that," said the official who asked not to be named." If the agreement is reached, the IMF is expected to endorse the new deal by early October and Belgrade will be allowed to draw funds only to bolster its currency reserves which in July amounted to 10.38 billion euros.
Under the terms of a previous 3 billion euro deal with the IMF that expired in April, Belgrade pledged to contain its 2011 budget gap at 4.1 percent of gross domestic product and secure a GDP growth rate of three percent. Serbia, an applicant for European Union membership, also pledged to cut its 2012 budget gap to 3.2 percent of GDP. Serbia's economy shrank by 3.1 percent in 2009, but grew by one percent in 2010, and a flash estimate last month showed 2.2 percent year-on-year growth for the second quarter of this year.
Following a rise of inflation in the first months of 2011, a spillover from a poor harvest in 2010, Serbian inflation in July fell to 12.1 percent year-on-year, and the central bank has said it could further slide to its target band for 2011 of between three and six percent.
The official said that an October increase of wages in the public sector which employs more than 500,000 people in the 7.3 million-strong country, as well as a rise in pensions, should not be a stumbling point. "This increase is a part of the budget law," the official said, referring to the October rise which will be the third in a series of gradual increases this year after a 2010 pay freeze.
In a statement, the central bank said talks with the lender will also focus on macroeconomic policies, the impact of global financial turmoil and measures aimed at protecting the Balkan country from possible consequences of the crisis. Last week, central bank Vice-Governor Bojan Markovic said the bank welcomed the government's readiness to make a deal with the IMF as this would lower risk premiums. To fill its budget gap, Serbia has also resorted to borrowing and it hopes to issue a Eurobond worth 700 million euros this year.
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