BELGRADE (Reuters) – Encouraged by renewed support from multilateral lenders and better-than-expected macroeconomic indicators, Serbia announced yesterday it expected its debt-to-GDP ratio to drop below 60 percent in 2005, despite new loans. Serbia this week won a preliminary accord with the International Monetary Fund, unlocking a new tranche as part of an $889 million three-year loan agreement, which expires in mid-2005. Belgrade last drew a loan tranche in late July 2003. It will be followed by the release of the World Bank’s $120 million 20-year credit, with a 10-year grace period and 0.75 percent annual interest, to support Serbia’s structural reforms. A further 95 million euros ($113.1 million) will be made available by the European Union in macroeconomic assistance. «To all critics of new debt, this agreement with the IMF is extremely important… Despite new loans, total debt-to-GDP ratio will drop to below 60 percent by the end of 2005 from 73 percent last year, Finance Minister Mladjan Dinkic said. In 2001, this ratio stood at 150 percent, he said. Acknowledging that talks with the IMF were extremely hard, Dinkic said the IMF accord was important because it saved the nation $600 million in additional debt relief from the Paris Club of sovereign lenders. Creditors granted Serbia a phased 66 percent write-down on its $4.5 billion debt in 2001, with a 51 percent forgiveness at the start of the loan deal with the IMF in 2002 and the remaining 15 percent kept until the expiry of the agreement in 2005. «Talks with the London Club of commercial banks are now on the agenda and we expect a deal that will leave us with a sustainable foreign debt. That agreement should help us reduce the debt burden on GDP,» Dinkic told a news conference. Serbia’s total outstanding debt stood at $14.3 billion in February, $2.7 billion of which it owed to the London Club. Economists have said that Serbia could face a debt crisis in 2007 and maybe sooner unless it boosts growth with greater investment and cuts in spending. External debt-servicing will reach 6.6 percent of GDP in 2006/07 and 8.3 percent in 2008-2010, according to central bank and IMF estimates. Serbia needs $1.2 billion a year in foreign direct investment to ensure sustainable growth and liquidity. To avoid a debt crisis, GDP should grow at least 4.0 percent in 2004, 4.5 percent in 2005 and 5.0 percent in 2010, economists say. Dinkic said yesterday he expected GDP to grow 6.0 percent and not 4.3 percent as initially planned, due to stronger-than-expected expansion of the industry in the first quarter of 2004. Under the IMF deal, Serbia must cut its budget gap to 2.5 percent of GDP from an initially planned 3.6 percent. It must also lower the balance of payments deficit to 11.0 percent of GDP from 12.5 percent in 2003 when GDP stood at an estimated $20 billion. Serbia’s central bank is to consider some monetary easing to help fuel growth after this week’s accord with the IMF obliged the state to cut its budget gap. Governor Radovan Jelasic told Reuters in an interview late Tuesday the easing could be achieved by releasing some savings deposited with the bank, boosting the lending capacity of commercial banks. Jelasic said the deal would keep the hands of the government tied when it comes to stimulating growth, planned at 4.3 percent in 2004. But the central bank could step in. «We are now considering a possibility to help stimulate growth with new savings, 50 percent of which are now being deposited with the central bank,» Jelasic said by phone from Frankfurt, where he stopped on his return from the Washington Spring Meetings of the IMF and the World Bank. The central bank launched the deposit immobilization rule in late 2000 to boost confidence in the financial sector after the state confiscated $4.0 billion during the era of Slobodan Milosevic. New savings stood at 1.0 billion euros in late 2003. It has considered releasing up to 15 percent of the funds. «Considering Serbia had a balanced budget in the first four months of the year and that the deficit would be created in the next seven months, there will hardly be room for further monetary easing,» he said, adding that the reserve requirement for banks would be kept unchanged at 18 percent. Despite criticism at home that the pact with the IMF could mean higher inflation, planned at 8.5 percent in 2004, and hurt the dinar, he said the 2004 dinar easing would not be dramatic. The dinar lost 11.3 percent against the euro in 2003. «The dinar will depreciate by a difference between domestic and eurozone inflation. We’ll also watch euro/dollar gyrations. But the inflation component is more important,» Jelasic said. The falling dinar and a lower budget deficit should help Serbia cut its $20 billion balance-of-payments deficit. «Lower consumption will lead to decreasing imports and a falling balance-of-payments deficit. But the key issue is to attract investments. These are vital to help us service the external debt,» Jelasic said. Serbia’s debt bill in 2004 is estimated at some $600 million, or 20 pct of its exports.