What did Serbia commit to in the new arrangement with the IMF?

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On December 20, the IMF Board of Directors approved a new arrangement with Serbia. As part of it, Serbia could withdraw 290% of its paid quota. According to the statements of our officials, this arrangement is important for financing the budget deficit during the next year. For this, the due tranches of these funds will be used during 2023, but therefore the available funds for 2024 will not be withdrawn and spent. However, loan withdrawal is not the only thing that is in this arrangement. What else is there?

Big increase in electricity and gas prices

Energy is the most important part of the new arrangement. The IMF is most interested in fiscal results – that public finances are healthy, which would mean that deficits are low and that public debt does not grow. But that is not really possible when Serbia is in the middle of an energy crisis, which was only worsened by years of mismanagement of the EPS.

Because we cannot generate enough electricity to satisfy domestic consumption, we have to import large amounts of electricity at high prices. This is happening in the middle of winter when electricity is normally more expensive and during the energy crisis in Europe due to gas supply problems resulting from bad political relations between the EU and Russia due to the war in Ukraine.
During this year, Srbijagas received funds from the budget in the amount of more than 1 billion euros in the form of subsidies, as well as 200 million euros in guarantees for loans that, according to everything, will have to be returned to the state budget. EPS also received large funds from the budget, in the amount of 630 million euros, which means that 1.83 billion euros had to be allocated for energy this year. Since the cost of the high-speed railway from Belgrade to Subotica is estimated at around 2 billion euros, it turns out that we have “eaten” the entire railway as a result of the party’s management of energy companies.

Probably, the main goal of the arrangement is to remove this burden of energy companies on public finances. This will be done by two things. The first is the change in EPS management, which should be led by professional management instead of party management, and the second is the increase in the price of energy, gas and electricity, primarily for households.

As for electricity, although its price has recently increased, it is predicted to rise by at least 8% in January, as well as by an additional at least 8% in May next year 2023, and again in November 2023 and May 2024. in the gas field, prices are also predicted to rise by at least 11% in January, and by an additional at least 10% in May 2023, November 2023, and May 2024. The state should register EPS as a joint-stock company instead of a public company, adopt a medium-term investment plan for next 2-5 years in the energy sector and to adopt the EPS restructuring plan.
The goal of these price increases is to remove Srbijagas and EPS from the budget, and to be able to finance their obligations from their own revenues – the program is expected to achieve this for EPS during the middle of 2023, and for Srbijagas at the end of 2024.

Everything else: reform of public administration, public finances, privatization

Outside of the energy, the arrangement is pretty lackluster. There are no major reforms or moves. The coverage of employees in the public administration should be expanded with a new central electronic register, which should include about 450,000 employees, which would practically be all employees in the civil service except for the army, police, security services and faculties. There are also smaller sectoral reforms in the area of ​​public finance management, such as the management of the action plan for medium-term financing.

Perhaps the most important thing would be the adoption of a new regulation related to the management of public companies: it would precisely set tasks and goals for these companies, with clear metrics for achieving the desired results, and create a clear framework for their operations. this would allow some of them to be organized differently and reformed, at least on paper.

In order to maintain a low deficit, the state promised that it would no longer issue loan guarantees to any of the state enterprises, except for EPS and Srbijagas. Guarantees of 600 million euros have already been provided for EPS, the repayment of which will probably fall on the budget in the future. The reform of the Tax Administration will continue, where the emphasis will be placed on the system of electronic invoices, new electronic services and the beginning of tax audits of individuals with high incomes and property values ​​through a new unit within the Tax Administration that was recently established.

As for the companies intended for privatization, the privatization of Petrohemija is decisively promised by the end of this year, as well as that the search for a strategic partner for Lasta will continue. In addition, it is promised that MSK from Kikinda will not start work. MSK is the largest consumer of gas in the country, and with the high price of gas as it is now, it will make bigger losses than if it does not work, which says a lot about the future of this company. It is also stated that the process of closing the old mines from Resavica will be continued and that the employment optimization program will be implemented there (read: dismissal of part of the surplus employees since this company cannot generate enough income even to pay salaries and therefore depends on state subsidies).

Furthermore, it is promised to stop the practice of keeping the directors of state-owned enterprises in acting status – which is otherwise an illegal practice that has been carried out for years, since the acting status can only last for 6 months at most, and directors are often in this status for years. This does not seem like a big change, because it is mostly the same loyal party cadres, but it would still be a small step in the direction of reducing the influence of politics on the management of public enterprises. According to the law, the director of a public company cannot be replaced easily, precisely so that he could resist political pressures and implement a business strategy that has the interests of the company in mind and not the party that appointed him to that position. That is why the director in acting status can be changed very easily, with one stroke of the pen.

If it works, we won’t touch it

This is perhaps the best description of Serbia’s new arrangement with the IMF. As long as the state of public finances is decent – as long as the deficit is kept within the given framework, and with it the public debt under control, neither side considers it necessary to do much in terms of reforms. The main emphasis is placed on the situation in the energy sector, because it threatens to sink public finances, and if the situation improves (of course, by shifting the burden of this crisis to the broadest sections of the population through an increase in electricity and gas prices), everything else loses primacy.

Neither the structural reforms of the economy, nor privatization, nor the reform of public administration receive special attention – the proposed reforms were mostly already agreed upon within the previous advisory arrangement and now only rewritten, and are not particularly ambitious or difficult to fulfill.

Of course, if some unforeseen circumstances occur, which can affect the increase of the deficit – the outbreak of a recession or a new collapse of the energy system in the short term, it is certain that we would witness some new efforts to put the deficit in order and reduce the increase in public debt. Let’s hope it doesn’t have to come to that, Talas writes.

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