Public enterprises will be a critical point of negotiations with the IMF

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Talks between the International Monetary Fund mission and the representatives of Serbia led by the governor of the National Bank, Jorgovanka Tabaković, began yesterday.

These discussions are being conducted within the third consideration of the results of the current program, the so-called IPC-Instrument for Policy Coordination which was started in June last year and lasts for 30 months.

This program is advisory, non-financial and therefore non-binding.
However, until November 4, “modalities of future cooperation with this institution” will be discussed, as stated in the NBS announcement.

It was announced earlier that Serbia showed interest in a stand-by arrangement with the Fund, and that arrangement is much stronger, the state has at its disposal a certain amount of money on more favorable terms than the market, but in return it is required to fulfill certain goals in the conduct of economic policy.

This is likely to be quite unpopular with governments, as the demands generally boil down to belt-tightening, cuts in public spending, reductions in deficits and public debt, if necessary even cuts in wages and pensions.

For example, in 2011, Serbia concluded an 18-month stand-by arrangement as a precaution, but the budget for 2012 was too spendthrift compared to what was agreed with the IMF, so the first revision of the agreement was not completed.

A few days ago, the IMF mission approved the arrangement with North Macedonia, which needs to be approved by the Fund’s executive board.

Experts point out that there will not be many surprises in the Fund’s requests and that the arrangement will probably be approved for us as well.

Jurij Bajec, retired economist and professor at the Faculty of Economics in Belgrade, points out that Serbia obviously now needs additional foreign exchange funds, which is why a stand-by arrangement is being sought, when we already have a valid advisory one.
“Even last time, we had funds at our disposal, but we didn’t use them, but now I think it will be different.

There are no secrets about what the IMF could be looking for. I don’t think it will affect monetary policy much, especially not exchange rate policy. Whatever it is and however much the foreign trade deficit is, the exchange rate is an anchor and I think that the IMF will remain with it”, assesses Bajec, who participated in negotiations with the IMF in previous governments.

On the other hand, according to Bajec, the fiscal policy will have to help the monetary policy.

“Fiscal policy should not continue spending as it did during Kovid. It will be necessary to be careful with spending and to go for selective assistance to citizens and the economy. Another issue is likely to be that there is no rush to raise wages in the public sector. And finally, there are public companies that have been a problem for a long time, but now it has crystallized. Otherwise, the Fund will indicate what the problem is, and it is up to the state to propose a solution that will be in line with expectations”, notes Bajec.

He adds that no one likes to be approached by the IMF.

“An agreement with them is always a bad sign. But with weaker countries, it looks better for investors when they have an agreement with the IMF. Again, it would be better if we had an investment rating, then they would look even better”, says Bajec.
The IMF was often known to previous governments to serve as an alibi if some unpopular measures were to be implemented. On the other hand, when it is shown that the measures have produced results, they do not hesitate to take the credit for themselves.

Therefore, the key thing that the IMF will insist on is the control of the fiscal deficit and public debt, especially with the rising cost of borrowing.

Among other things, that is why Serbia is asking for money from the IMF because it is cheaper than what we can get by issuing bonds on the international market.

In April 2020, in the middle of the pandemic, Aleksandar Vučić, the president of Serbia, said that the IMF offered them one billion euros at an interest rate of three percent, but that we could borrow more cheaply on the market.
If that interest is still current, it would now be more than twice as cheap as investors are asking to buy our debt.

The yield on our Eurobonds exceeded eight percent, which is more than the yield on those famous Eurobonds that we issued in 2011 at 7.25 percent, which the new government later often talked about as the ruin of our public finances.

Ivan Nikolić, associate of the Economic Institute points out that the liquidity that the IMF can offer under more favorable conditions than the market is the main reason why we sought an arrangement.

“We would not be able to borrow below eight percent now. It is much more favorable with them. This also means some conditioning in the conduct of economic policy.
This primarily refers to fiscal politics, management of public enterprises and structural reforms. What and how much will be requested is a matter of negotiation”, explains Nikolić.

Formally, the Government creates a program and submits it to the Board of Directors of the IMF for approval, but in practice the program is created in consultation with IMF experts.

“At this moment, there is no need for money, because our budget situation is better than planned. This is more of a reserve for an unfavorable development of the situation. The subject of the conversation will primarily be the budget for 2023 as a framework for the economic policy for the next year, but I don’t think there are any disagreements. Salary and pension increases, although nominally seem high, when inflation is taken into account are not a risk for public finances.

I think the critical point will be the management of public enterprises. Whether it will be the transfer of public companies from the Ministry of Finance to the Ministry of Economy or something else depends on the discussion. A new government will be formed in accordance with that”, notes Nikolić, Danas writes.