Serbia needs to quickly slash public wages and pensions 15 percent and fix unprofitable state-owned companies to narrow its budget gap and keep the Balkan country solvent, the nation’s Fiscal Council said.
Failure to move ahead with developing a long-term plan to squeeze the shortfall to 3 percent of economic output by 2017 may push Serbia into a debt crisis, Pavle Petrovic, the head of the three-member Fiscal Council, said in Belgrade today.
“If public wages and pensions were not reduced, Serbia would face deficit-financing problems already in the first half of 2015,” Petrovic said. “The government should not forget that cheap borrowing will not last much longer as the Fed will probably start raising its rates before the end of 2015.”
Facing a third recession in five years, Premier Aleksandar Vucic’s 100-day-old government is promising a 10 percent reduction in public wages and pensions to tame the gap. The council, appointed by parliament to oversee fiscal compliance, forecasts a deficit of 2.6 billion euros ($3.48 billion), or 8.3 percent of gross domestic product, this year.
The country already needs about 5 billion euros a year, or 17 percent of GDP, to borrow and cover the budget gap and service maturing debts. Risk of a debt crisis emerging grows when financing needs exceed 15 percent of GDP, he said.
The yield on Serbia’s dollar bonds, maturing in 2021, rose 23 basis points, or 0.23 percentage point, to 4.913 percent by 4:12 p.m. in Belgrade, data compiled by Bloomberg show.
Rising Costs
Public wages and pensions, which consume 11 percent of GDP and 14 percent of GDP respectively, are less of a problem than unprofitable public companies, whose costs to the budget are at 1 billion euros a year “and still rising,” Petrovic said.
The 15 percent cut in wages and pensions would save 800 million euros, compared with 470 million euros in savings with a 10 percent reduction, he said. Savings should amount to 2 billion euros through through 2017, he said.
Vucic has pushed labor code and pension law through parliament aimed at cutting the funds the government pays to more than 780,000 public-sector workers and almost 1.7 million pensioners.
Lawmakers are expected to back new laws on asset sales and bankruptcies on Aug. 2 to save the $800 million paid each year from the budget and keep close to 600 companies alive.
The changes are “welcome, but investors want to see immediate effects,” Petrovic said.
Wage and pension cuts less than 15 percent would require a two percentage-point increase in the value-added tax, he said. Credible fiscal restraint should be accompanied by monetary policy relaxation, he said, and needs to be backed by the International Monetary Fund.
Monetary easing should help avoid deflation amid a renewed economic contraction, Petrovic said. The economy contracted a preliminary 1.1 percent on the year in the second quarter, according to the statistics office. Proposed savings, which need to cut the budget gap by 3 percent of GDP in 2015, will translate into a 1 percent drop in economic activity next year.
“In the end, the key test for Vucic will come in the fall, and whether he delivers the fiscal consolidation, and signs up to an IMF program,” Timothy Ash, a London-based economist for emerging markets at Standard Bank Group Ltd., said by e-mail today. “After the landslide election victory earlier in the year, he simply has no excuses.”
Source Bloomberg
