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Is the National Bank of Serbia late or not in tightening the monetary reins, who is to blame for the high inflation and who for the budget deficit

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Although it was she who began her address at the jubilee 30th Kopaonik Business Forum by recalling the hyperinflation of 1993, when this forum was first organized, Jorgovanka Tabaković, Governor of the National Bank of Serbia, presented a series of optimistic forecasts afterwards.

Her most important messages to the business elite gathered again this year at the most famous ski destination in Serbia, at least when it comes to monetary policy, are forecasts of a gradual easing of inflationary pressures and a stable dinar, which continues to be an imperative of the central bank. She expects that inflation will return to the planned corridor in the middle of next year, but also that at the end of this year it will be half as much as at the beginning of it.

Recalling that its growth up to almost 16 percent was mostly influenced by the world prices of energy and primary products, Tabaković said that the price of oil on the world market in June 2022 was 74 percent higher than in June 2021, that the price of gas last spring was four times higher than in mid-2021, and food prices at the end of last year were 30 percent higher than before the pandemic.

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“The effects of the policy of cheap money, i.e. negative interest rates in certain countries, have also accumulated, and the consequences were also felt by those countries that did not implement such a policy”, said the Governor of the National Bank of Serbia, stating that global trends – the food price boom – are the most responsible for inflation in Serbia and energy products on the world market.

On the other hand, from Pavlo Petrović, the president of the Fiscal Council of Serbia, it was possible to hear that inflation in Serbia is not only imported, i.e. it is not the result of price growth at the global level, but at least one third of it, i.e. between five and six percent, is domestic origin.

Without denying the record inflation in the USA and Europe, dating back to the eighties of the last century, Petrović reminds that inflation in those economies is now on a downward path, so in America it was already reduced to 6.4 percent in January, while in the Eurozone it is currently around eight percent.

In Serbia, on the other hand, it is almost 16 percent, and the biggest culprit for its growth, as far as domestic factors are concerned, is the wasteful fiscal policy during the years of the covid crisis, when at least two billion euros more than was justified were spent on indiscriminate anti-crisis measures.

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Comparing inflation rates in our country and in the countries of Central and Eastern Europe, which are somewhat higher, Petrović warns of another pitfall of Serbian economic policy. This is the reining in of electricity and gas prices, which in the region increased significantly more during 2022, while in our country they contributed to the dampening of the growth of the general level of prices.

The President of the Fiscal Council considers it a wrong economic policy. Artificially maintained inflation at a lower level than it would have been if there had been no control of electricity and gas prices will only come to our attention during this year, and the result will be a slightly longer return to the target inflationary framework than in countries that increased energy prices last year. in accordance with their growth on world stock markets, warned Petrović.

It was also possible to hear from the representatives of the IMF that Serbia must increase the prices of the main energy sources and continue to tighten the monetary policy in order to curb the still growing inflation. Speaking about the possibility that the NBS will raise the reference interest rate again this week, Yulija Ustyugova from the IMF pointed out that “prematurely taking the foot off the brake” must not be allowed, as this could lead to an even slower return of inflation to the set goals.

The President of the Fiscal Council reproaches our and other countries’ central banks for being late and hesitant to tighten monetary conditions, which is why inflation flared up more than it should have.

Responding to such complaints, Jorgovanka Tabaković denies responsibility. She claims that the NBS was one of the first to react to the rise in prices by gradually tightening the monetary policy, first of all, by increasing the executive repo rate, while from April 2022 the reference interest rate has been continuously increasing, which has been increased from the then one percent to the current 5.5 percent.

And while controlling the prices of electricity and gas contributed to keeping inflation from being even higher than the current 16 percent, twice as high as in the Eurozone, the uneconomic prices of these energy sources, along with poor management of public enterprises and the absence of reforms, contributed to almost the entire last year’s budget deficit it is precisely these costs that “eat”.

According to the calculation of the Fiscal Council, the total budget payments for Srbijagas and EPS, ending this year, will be between three and 3.5 billion euros.

And the new head of the IMF’s mission in Serbia, Donal McGettigan, pointed out that energy, i.e. the increase in electricity and gas prices, is actually the backbone of the new standby arrangement with that international institution, and that the IMF expects both the fiscal and monetary authorities in Serbia to use joint forces to restrain inflation.

In addition to the additional tightening of monetary policy, the Fund’s mission also expects EPS, in addition to correcting the price of electricity upwards, to implement reforms, because small investments and bad management are long-standing problems of this public company.

In addition to considering it imperative to contain inflation, the participants of the forum also pointed to the risks related to the modest rates of economic growth achieved in the previous year by Serbia and some other countries of the Western Balkans.

Pavle Petrović calls the economic results of Serbia solid, but not spectacular, while Aleksandar Vlahović, president of the Association of Economists of Serbia, organizer of the Kopaonik Business Forum, warned that the main risks for the economy and its resilience in times of geopolitical crisis are actually further escalation of war conflicts, slower recovery of China and its problem with covid, then the spillover of the negative effect from the exploding real estate market, as well as the debt crisis in some over-indebted countries.

Vlahović pointed out that he does not expect a recession in the leading European economies, except perhaps the technical one – a short-term low rate of economic growth. “However, the time ahead is full of challenges, the risks are present and unfortunately difficult to measure and predict,” he pointed out, with a remark similar to that of the new head of the IMF mission that wages in the public sector must not grow faster than GDP.

Vlahović added that he did not want to act as “the devil’s advocate, but that before the world economic crisis in 2008, Serbia had a low level of public debt, a low budget deficit and a solid GDP growth rate, but then something happened that should not happened”, alluding to the explosion of public spending and the increase in the deficit, which ultimately resulted in the disruption of economic stability to the edge of sustainability and the need to start fiscal consolidation at the end of 2014.

That is probably why the new head of the IMF mission called fiscal consolidation one of the best reform moves in this region and called on the creators of Serbian monetary and fiscal policy to remain as disciplined as they were then, NIN Magazine writes.

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