We need reforms and responsible spending or else there will not be enough money to pay back [the] loans, Radovan Jelasic, national bank of Serbia (NBS) governor told Emerging Markets in an interview.
The governor urged a budget deficit ceiling of 3% of GDP which would provide an institutional guarantee of prudence and boost market confidence. He also called for fiscal responsibility to be enshrined in the constitution. Serbias deficit is currently 2.6%.
He added that the governments reliance on external borrowing sources might undermine a culture of responsible public spending.
Getting cheap money is not the best way to teach you fiscal prudence, he said. This contrasts with the market discipline instilled by borrowing in the international capital markets.
He also said revenues could undershoot government forecasts as market expectations of a 3.5% contraction in growth this year could prove optimistic amid a severe regional meltdown.
The IMF lent Serbia 3 billion under a bailout plan in March that replaced a smaller package in January, as the country was hit by greater slump than expected.
The deal envisages a 2.3% fiscal deficit this year as well as large-scale public spending cuts. Rising domestic discontent has potentially restricted the scope for further austerity measures.
The IMF deal has helped the country negotiate loans from other international creditors. On Monday, the European Investment Bank announced series of loans worth over 1.4 billion euros over the next two years. At the end of last month, the World Bank agreed to provide the country an additional $300 million for budgetary support this year.
The NBS defied market expectations last Tuesday by leaving its key policy rate on hold at 14%.
Jelasic said monetary policy would be eased gradually since inflation is expected to hit 9% this year and in a bid to anchor medium-term inflation expectations.
The crisis in the last 40 years has meant inflation has gone up and in every crisis period in Serbias history, there were high expectations by all economic agents that inflation will go up, he said.
The speed and sequencing of interest rate cuts will take consideration of the medium to long-term consequences.
Last month deputy prime minister Mladjan Dinkic called on the central bank to cut rates to stimulate the economy, adding that the government had run out of fiscal firepower.