What did Serbia promise the IMF for a new arrangement?

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Serbia recently sent a letter of intent to the International Monetary Fund, wishing to re-enter into a precautionary arrangement with this international financial institution after the successful expiration of the arrangement in January this year. As before, Serbia does not intend to withdraw money from the IMF, ie. to borrow from him, but for this to be a signal to investors that economic, and especially fiscal policy, is on the right track, which should increase interest in bonds held and help keep the interest rate on public debt low. The arrangement with the IMF provides credibility in this direction, as it is accompanied by reform moves with a pre-agreed timetable – in other words, this arrangement publicly commits the Government to take some steps that should have a positive impact on the fiscal situation and economic situation in the country. Since such arrangements undergo an occasional review comparing what was promised and what was actually done, and that the IMF may terminate the arrangement if the other party does not comply with its obligations, such reputational embarrassment is a strong incentive to make promises in the end and fill.

Public finances and state enterprises
Serbia has pledged to take 9 reform steps during the 30-month program. They are divided into two areas – public finance (4 goals) and management of public enterprises (5 goals).
1. Publish monthly fiscal reports according to the GFSM 2014 methodology.
2. Publish a list of state aid schemes, including the amount of funds and the adoption of new bylaws that should bring the Law on State Aid Control into line with EU rules.
3. Adopt a methodology for monitoring fiscal risks, including those arising from state-owned enterprises, local government, litigation and natural disasters.
4. Adoption of new fiscal rules on the amount of the deficit based on the level of public debt.

Of these reform steps, only the adoption of new fiscal rules is something that would be a big deal in practice. The current fiscal rules were introduced in 2011 in the Law in the budget system, but in practice they were not respected at any time when it was supposed to limit the state’s decision on the amount of the deficit 2011-2015. while the rule on the amount of public debt (maximum 45% without restitution costs) has not been respected for a single year so far. The question is not only how the new fiscal rule should be, and from the proposal it can only be inferred that the allowed amount of the deficit will be related to the amount of public debt, in principle lower debt, higher deficits are possible, but also whether it will remain only as part of the law (which, as we have seen, is easily violated without consequences) or will become part of the Constitution, which should facilitate their implementation, as is already the case in many European countries, for example Bulgaria and Germany.
In theory, changes in the field of state aid control would be a very big and welcome thing, because it would create systematic control over to whom and how much state aid (subsidy) is paid. Subsidies are one of the major problems of public finances in Serbia, as they are about 3 times more than is the case in countries in transition that have become members of the EU. But having in mind the current situation in this area, as well as the fact that it is a big political issue, there is a big doubt whether such rules will really be applied in practice, because it would pretty much limit the executive to distribute state money with a fist and a hat. how it decides for itself as has been the case in practice so far. Therefore, immoderate optimism is out of place here.
The remaining two reforms are technical details that are individually important for the transparency of public finances, and for the quality of macroeconomic projections and medium-term documents (such as fiscal strategy, but will benefit international financial institutions or public administration more than they will. any impact on the economy).
As for the second area, the management of state-owned enterprises, the situation is not much better here either.
1. Adopt a new strategy for stock market development.
2. Adopt an Action Plan for the implementation of the Strategy for the Management of State-Owned Enterprises.
3. Develop a database with registers of all state-owned enterprises and their assets, and develop a mechanism for the approval of key enterprise decisions by the Ministry of Economy.
4. Adopt a new Law on Management of State-Owned Enterprises.
5. Change the status of Elektroprivreda Srbije (EPS) from a public company to a joint stock company.

In this section, ambition also seems rather weak: while these steps are welcome, it’s all a drop in the ocean of things to do. The results of the Government so far (but also most of the previous ones) in this area are quite bad, since public and state-owned companies are managed non-domestically, but they are used for coalition bribery and money laundering through corrupt public procurement and employment of party activists. But it is really a scandal that there is still no list of complete assets of these companies, to know what all their and state ownership is, because the list of companies in which the state owns at least 10% of shares has only recently been completed. The new Law on Management of Public Enterprises could be a good step, but the problem is much bigger in non-compliance with current regulations, than in their quality. The problem lies primarily in incentives and political will, and that will not change any list of reform intentions from the arrangement with the IMF.

Promises and assurances
In addition to these firm promises, which are accompanied by an exact time limit for their fulfillment, there are a number of “softer” promises, which are not time-based or for which less clear formulations have been used, such as: “we will take care”, “we will try” and the like. Therefore, this is more of a wish list and can be more easily violated, especially in the case of some external pressures (such as the new economic crisis), although it is more likely that the main culprit would be domestic political developments (given that next year elective).
The most important such formulations concern fiscal policy, primarily public spending. Serbia has pledged to continue to use the legal formula for indexing pensions, but that pensions will stop increasing as soon as total pension expenditures reach 11% of GDP (currently at 10.2% of GDP). ). It is stated that the republic budget will record low deficits from next year and that high capital spending (investments in infrastructure) will be preserved while the current one will be reduced; as well as that “options” for reducing the tax burden on labor income and the progressiveness of payroll taxation will be studied. There are also standard formulations from every letter so far about the intentions to improve the domestic business environment, strengthen the rule of law and lead the fight against corruption, which are more platitudes than real aspirations, having in mind the results so far on these issues since 2012. Similarly, it promises to improve the management of state-owned enterprises and that “efforts will be made” to address the over-reliance on the acting directors instead of real directors. In other words, the state undertakes to the IMF that it will respect its own laws, and that is that the director of a state-owned company cannot be in the acting office. term of office longer than 6 months, although it is a widespread phenomenon.

Will and how will the promise be fulfilled?
When scratched under a rigid bureaucratic language, there are no epochal announcements or promises. The program is relatively decent, because the envisaged measures are necessary, but the overall reform obligations and intentions of the Government during this period are quite lukewarm and bloodless. For this program to really have a stronger effect on the economy, the list of reforms should be much longer and more significant. A special problem is that a large number of these promises are vague and too vague, so the final solution, although it fulfills the proposed form, can become a bigger problem than the one that the solution should correct. Two key areas for better business operations, namely raising the level of the rule of law and improving the business environment, remain only on the list of good wishes, without any operationalization in specific goals. In other words, these topics will continue to remain at the forefront of political priorities because they could interfere with ingrained political and business interests.