Serbia must freeze public sector wages, speed up reorganization
BELGRADE – Serbia should immediately freeze public sector wages and speed up structural reforms to avoid restarting a cost-wage spiral and keep inflation on track, a senior International Monetary Fund official said. Recent data showed 27.45 percent year-on-year wage growth across the economy in July, against a 13.6 percent rise in industrial labor productivity, due to a shrinking number of workers. The wage hikes could affect Serbia’s competitiveness, its ability to grow and create jobs, and spoil its economic outlook, IMF resident representative in Belgrade Harald Hirschhofer said. «There are no easy solutions to fix this economic policy mistake,» Hirschhofer said in an article offered to Serbian newspapers for publication on Friday. «The first best measure would be to implement an immediate wage freeze and/or partially reverse previous wage increases.» Eroding wages through inflation would not cure the problem. Instead, Serbia should consider cutting fiscal spending. Higher taxes could offset the impact of an expansionary wage policy and structural reforms could lead to more cost controls, he said. «Why am I concerned about the sharp wage increases? Macroeconomic weaknesses will deepen, making Serbia’s economic outlook more clouded,» Hirschhofer said. «More money in the pockets of wage earners will increase their demand for consumption and their ability to take out consumer loans. This creates inflation and puts pressure on the National Bank to tighten policies to protect the purchasing power of the dinar.» Serbia’s 2007 budget, nearly 30 percent higher than in 2006, allows for a 13 percent increase in individual wages this year. Its plan to keep public sector wages unchanged in 2008 has outraged trade unions of teachers, policemen, health workers and other budget beneficiaries, who threaten to go on a strike if the Finance Ministry imposes the freeze. Serbia’s economy has grown by over 6 percent a year since 2004, and inflation fell to a 15-year low of 6.5 percent at the end of 2006 from nearly 18 percent in 2005. In a report this week, Serbia’s Development Bureau also pointed to the lax wage policy and said that a 30 percent growth in retail trade in January-July had tracked the wage-driven surge in consumer demand, while the macroeconomic picture remained mixed. «Inflating away the wage increases would clearly be an even greater mistake. Everyone will quickly understand that inflation erodes wages and a vicious cost-wage spiral will be restarted,» Hirschhofer said. Headline inflation in August hit 6.3 percent, nearing the 6.5 percent planned for the whole year. Analysts believe the end-year figure will be closer to 8 percent. The central bank raised its benchmark two-week repo rate by 25 basis points to 9.75 percent on August 28 to counter surging price pressures, after monthly core inflation hit a 21-month high.
