Serbia aims to pass measures to boost economy, analysts say savings needed

Mon May 12, 2014 10:19am EDT

Related Topics

* Govt plans to allocate 60 mln euros to ensure cheaper corporate loans

* Plans to introduce tax relief for new hires

* Analysts say savings steps needed to avoid national debt growing

By Ivana Sekularac

BELGRADE, May 12 (Reuters) - Serbia plans to adopt measures this week including subsidies for commercial corporate loans and tax relief for new job hires to revive the economy and help reduce unemployment, the prime minister said on Monday.

Analysts immediately warned that without rigorous saving efforts possibly including pension cuts, the proposed measures risked further inflating the Balkan country's budget deficit, now seen at 7.1 percent of national output.

Centre-right Prime Minister Aleksandar Vucic met heads of major commercial banks on Monday to discuss the government's plan to allocate 60 million euros to banks to cover the cost to them of offering lower interest rates to corporate borrowers.

"We hope that in that way the banks will be able to place up to 1.2 billion euros (in loans) to companies," Vucic said at the start of the meeting.

Vucic, who took power last month, will later on Monday meet foreign investors and local corporate leaders to discuss steps to reduce unemployment, currently around 20 percent.

To encourage investment, the government may pay health insurance and pension contributions for 7 out of 10 new workers hired by companies, the prime minister said on Sunday.

The package, to be sent to parliament on Thursday, will also include measures to boost construction and provide cheaper housing mostly for civil servants, Vucic said.

Vucic has pledged root-and-branch reform of the bloated public sector, which employs nearly 800,000 people, to secure a financing deal with the International Monetary Fund.

The government is forecasting 1 percent economic growth this year, but analysts say the economy could stagnate as fiscal consolidation may hamper domestic demand.

Milojko Arsic, a lecturer at Belgrade's Economics Faculty, said subsidies for commercial loans would bring more liquidity to the business sector, where non-performing loans now make up 30 percent of all loans. But he cautioned:

"To secure the funds for subsidies, the government will have to make additional savings to keep the deficit within its forecast. I personally think it will be difficult to achieve (the savings) without a pension cut," he said.

A 10 percent cut in public sector wages will be implemented as of July, and the government said it will decide in October whether it needs to cut pensions as well.

The EU candidate country has kept more than 100 indebted state-owned companies on life support since 2000 via hefty subsidies, resulting in the public debt climbing to 63 percent of national output.

But it will have to cut state support to those companies, which employ 60,000 people, to get a budget-support loan from the World Bank and to secure an IMF deal. (Editing by Zoran Radosavljevic and Hugh Lawson)

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