Serbia’s central bank asks next government to follow a tighter fiscal policy in 2004

BELGRADE – Serbia’s central bank yesterday urged the parties which will form a government after Sunday’s general election to tighten fiscal policy in 2004 to protect economic stability built up since Slobodan Milosevic’s fall. The hardline nationalist Radical Party came a clear first in the election but does not have enough seats on its own to form a government. More pro-Western parties could form an administration together but have not yet begun negotiations. «We are entering the fourth year of stabilization… The key to maintaining stability is to keep tight monetary policy and pursue an even tighter fiscal policy to suppress excess demand,» the central bank governor, Kori Udovicki, told a news conference. Since reformers ousted Milosevic in a popular uprising, the central bank has helped slash inflation to 7.7 percent in 2003 from 126 percent in 2000 and hard currency reserves have jumped to $3.5 billion from $350 million. «The aim of next year’s monetary policy is to consolidate the results achieved in the past three years,» Udovicki said. For its part, the central bank said it would continue to pursue a tight monetary policy aimed at lowering inflation to 7 percent year-on-year and keep the dinar currency stable. Hard currency reserves were seen growing $150 million as the central bank forecast lower privatization receipts and foreign financing and an unchanged trade gap of around $4.5 billion. «Next year brings many serious challenges. This is the first time we are trying to further lower inflation even though the level of carried-over dinar depreciation is higher than the level of carried-over inflation,» Udovicki said. The dinar currency, linked to a euro/dollar basket at a 70-30 ratio, has lost 11.8 percent of its value against the euro in 2003. The central bank has been keen to lower its value in an effort to ease Serbia’s balance of payments deficit. «We will need a month to see how the election outcome affects the market and how foreign clients perceive the risk in Serbia,» a local currency trader said. But foreign analysts appeared to be fairly confident of Serbia’s future, saying that investor interest built up in the past year was unlikely to dissipate easily. «Despite the resurgence of nationalism and radicalism, pro-democracy parties are highly likely to maintain the upper hand in the new legislature,» Alex Garrard of UBS said in a research note. A central bank official, who asked not to be named, told Reuters the bank would resist any political pressure from a new government to print money. He also said if there was too much liquidity in the banking system, the central bank would increase the reserve requirement for commercial banks.