Serb 2008 draft budget cuts gap; central bank is disappointed

BELGRADE – The Serbian government released its 2008 draft budget this week, lowering the deficit slightly but failing to meet central bank demands for deeper public spending cuts to help choke off inflation. The draft sees a deficit of 0.5 percent of gross domestic product, slightly down from a 0.6 percent gap planned this year, with public spending to grow a nominal 9.9 percent, year-on-year, to 654.4 billion dinars ($12.35 billion). Though the overall shortfall is lower, spending was reduced by just 0.8 percent of GDP over 2007, below the originally planned target of a public spending cut of 1.7 percent of GDP in 2008 to help curb domestic inflationary pressures. The government has helped stoke inflation pressures by raising public sector wages by more than 30 percent this year, and Radovan Jelasic, the central bank governor, said last week that he was disappointed with the budget draft. But Finance Minister Mirko Cvetkovic told journalists the government had to look further than the bottom line when drawing up its fiscal plans. «There have been consultations with the central bank, but we have not accepted their remarks because it is not only economic factors but also social and political circumstances at this moment that determine the budget,» he said. The central bank on Monday left interest rates unchanged but said that monetary tightening may be needed in the near future due to building inflation pressures and worries fiscal policy will be looser than expected. Analysts have urged more fiscal tightening for 2008 when the debt servicing bill is expected to rise, according to Cvetkovic, to $902 million. But belt-tightening is proving difficult since Serbia is scheduled to hold local and presidential elections. The budget draft showed that the government expects the economy to grow 6 percent in 2008 and the current account deficit is seen at 14.1 percent of GDP in 2008, down from 14.7 percent planned for 2007. «The current account deficit could not be lowered in the short term, it is important to establish a downward trend. Its main generators remain a high trade gap, high demand and high salaries. But it is important to increase the competitiveness through faster structural reforms,» Cvetkovic said. Public sector wages will rise by another 16 percent in 2008. The government missed an October 31 deadline for approving the budget and in mid-October the Finance Ministry admitted the cut in the deficit would not be as deep as originally hoped. The budget sees the foreign debt to GDP ratio rising to 56.8 percent from 55.5 percent this year and Cvetkovic said the government could tap sources such as the World Bank or EBRD for funds next year to help finance infrastructure projects, though he did not give further details.