Belgrade’s price controls seen as a step in the wrong direction
BELGRADE – Recent price controls announced by Serbia’s new government are seen as politically motivated and likely to have little impact other than to harm investor confidence in the country’s path to a free market. The government, a coalition of pro-Western and nationalist parties, came to power in May pledging to push reforms and encourage investment. But with presidential and local elections coming up, and the ultranationalist, populist Radical Party making gains in opinion polls on public unease over the prospect of an independent Kosovo province, the government’s reformist zeal has waned. After years of war in 1990s stunted its growth, the Serb economy is now growing strongly, expanding at an 8.7 percent clip in the first quarter, year-on-year. But instead of taking the opportunity to push free market policies further, the government has announced price controls for bread and edible oils, and has scrapped a planned electricity price hike – much needed by the indebted power monopoly. «Negotiating prices like that is a threat to the mechanisms of the market economy,» said Jurij Bajec, a professor of Economics at Belgrade University. «It is a bad signal for anyone who is doing business here. The best government is one that sets the rules and sticks to them. Any interference by the state represents a change in the rules of the game.» Most analysts agree that with a presidential election due by the end of the year, and local elections to follow in the first quarter of 2008, the moves are politically motivated. They said a 29.5 dinar ($0.49) cap on a loaf of bread does little to address the cause of rising prices – a drought that has hit crops hard – and that the government should have intervened using commodity reserves or allowed emergency imports as price caps could ultimately lead to shortages in the market. They added that the food price caps were ill-advised as they could lead to more widespread price controls in a country where 45 percent of prices are still controlled by the state. «Any administration (of prices) is a step in the wrong direction,» said IMF resident representative Harald Hirschhofer. Serbia has bad memories of out-of-control prices. It experienced hyperinflation in 1993, when prices rose at 60 percent an hour and a 500 billion dinar banknote barely bought a loaf of bread. But with public sector wage growth at more than 40 percent over the last year, fears of inflation spiralling out of control are starting to spread. The government also fears a revolt by the roughly 1 million unemployed in Serbia – nearly one-third of the active workforce – and has said it wants to hold inflation under 10 percent, and expects it at 6.5 percent for 2007. The central bank, however, is concerned over growing price pressures and a fiscal expansion planned for the second part of the year. It is also wary of a current account deficit seen at 14 percent of gross domestic product (GDP) this year. Against government wishes, the central bank hiked its key policy rate this week for the first time after 10 months of easing to ensure inflation remains tame. Vladimir Gligorov of the Vienna Institute of Economics said the caps were not unusual, as price controls have been used by every government since the fall of Slobodan Milosevic in 2000 as a way of controlling social unrest in the face of transition. «Prices in Serbia are a matter of politics,» Gligorov said. «By preserving social peace, the government is keeping itself in power.»
