UPDATE 2-IMF says Serbia likely to seek a new standby deal

Tue Feb 22, 2011 6:34pm EST

Related Topics

* Serbia leaning toward new IMF loan arrangement

* Focus of new programme on economic reforms (Adds IMF statement in paragraphs 15 and 16)

By Adam Tanner

BELGRADE, Feb 22 (Reuters) - Serbia is likely to seek a new precautionary standby arrangement from the IMF when its current three billion euro deal expires in April, IMF officials said on Tuesday.

"We understand they are inclined, they are leaning to a precautionary standby," Albert Jaeger, head of an International Monetary Fund mission to Serbia, told Reuters in an interview.

Under the expiring 3 billion euro IMF deal that started in 2009, Serbia pledged to keep its 2011 deficit to 4.1 percent of GDP versus a 4.8 percent target last year, and to secure three percent growth after 1.5 percent in 2010.

The new "programme's value in this particular case would be not in terms of supporting the reserve posture of the National Bank of Serbia but ... in terms of putting in place reforms that would make the economy less vulnerable," said Bogdan Lissovolik, the IMF's resident representative in Serbia.

"In some cases it will mean taking some tough, painful decisions and reforms that the government would want to be part of the package."

At a later news conference, Serbia's central bank governor expressed support for a new IMF deal in the period ahead of scheduled 2012 elections and amid union pressures for higher wages.

"We believe that in the upcoming period an arrangement with the IMF would be useful for Serbia," said Dejan Soskic. "Our relatively good reputation on international financial markets would be further strengthened through concluding a new arrangment."

He added that it was important for Belgrade to embrace structural reform, for which IMF help would be valuable.

The world economic crisis slowed economies across the Balkan countries aspiring to join the European Union, prompting Serbia, Bosnia, Kosovo and Macedonia to turn to the IMF for loans.

"This region is lagging behind most of the other parts of Eastern Europe," Jaeger told Reuters.

STRUCTURAL REFORM NEEDED

Serbia, the largest of the countries to emerge from communist Yugoslavia, experienced slightly higher growth last year than expected, at around 1.8 percent, Lissovolik said.

Nonetheless, the EU applicant country with a pro-Western government coalition faces considerable economic work ahead.

"The challenge we have here is that we have a pre-crisis kind of growth model in Serbia that was simply not sustainable," Jaeger said. "The crisis clearly unmasked that unsustainability."

"What we need is an economy that is more based on private sector activity and more exports and more tradeables, so you have to achieve the conditions for that."

In a statement, the IMF said it had reached an interim agreement, which is subject to IMF board approval, with the authorities on the release of the final disbursement of 365 million euro under the current IMF loan programme.

The IMF said Serbia had met all of its performance criteria through the end of December, although noted that inflation exceeded the target by 2.2 percentage points due to rising food prices.

Speaking about the current IMF programme that expires on April 15, Jaeger gave a mixed assessment: "This programme has achieved a lot of things but probably did not achieve that much on that which is usually put under the rubric of structural reforms.

"Serbia had a situation where the external balance was very entrenched, basically their spending was significantly above income and that situation was there going back several years."

The Serbian dinar lost about a third of its value between late 2008 and the end of last year, although it has strengthened somewhat in 2011.

"To us, it looks now at a competitive level," Jaeger said.

Lissovolik said it often takes three or four years for the economic benefits of a depreciated currency to have their full impact, so Serbia could still see a boost from the currency revaluation. (Editing by Stephen Nisbet and Andrew Hay)

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