UPDATE 2-IMF, Serbia agree 3 bln euro deal, spending to dive

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By Gordana Filipovic

BELGRADE, March 26 (Reuters) - The International Monetary Fund and Serbia have agreed a 27-month, 3 billion euro programme to help the Balkan nation enforce the biggest spending cuts in years needed to anchor its weakening economy.

"Serbia's GDP will almost certainly decline in 2009 ... It looks more likely to be minus two percent. And we believe that growth in 2010 will be flat," Albert Jaeger, IMF chief of mission, told a news conference.

He said the loan would probably be approved in early May and fiscal adjustment was the key tackling Serbia's external and domestic financing gaps.

The IMF said a fiscal gap of 3.0 percent of GDP was the maximum Serbia could finance, while a sharp fiscal adjustment, including a wage and pension freeze in 2009 and 2010, will help Serbia attain a more balanced external position.

The government is expected to revise down its 2009 budget in the next few weeks and state administration is expected to bear the brunt of the fiscal adjustment.

The new IMF programme replaces a $520 million loan approved in January and relies on fresh spending cuts, needed to offset underperforming fiscal revenues as the local economy suffered a stronger than expected downturn.

Finance Minister Diana Dragutinovic said poor revenues in the first quarter meant the government needed to enforce a fiscal adjustment worth 100 billion dinars or 3 percent of GDP.

Central bank Governor Radovan Jelasic said Serbia had reached a "turnaround in the process of fiscal tightening".

"This is the most significant and the biggest fiscal adjustment since reforms started. It is equivalent to eight percent of consolidated budget," he told the same news conference.

Independent analysts see Serbia's GDP contracting by up to 5 percent in 2009, following years of growth averaging 6.7 percent. The government still has to revise its projections of flat growth or a mild contraction this year.

Serbia's neighbour Romania this week secured a 20 billion euro IMF-led rescue plan, designed to thwart a financing crisis. (Reporting by Gordana Filipovic; Editing by Zoran Radosavljevic)