Political volatility should no longer impede economic progress and the government should adopt a fiscal surplus or at least a balanced budget and comply with the Hague tribunal, central bank governor Radovan Jelasic has told Emerging Markets. “We need to repay the EU’s confidence in us and the move should give new momentum to speed up reforms and fulfil our duty to the Hague”.
The European Union announced yesterday that it will resume stabilization and association talks with Serbia on June 13 after Belgrade improved cooperation with the U.N. war crimes tribunal for the former Yugoslavia, based in The Hague. G8 countries agreed today to delay a vote on independence for Kosovo, wishing to avoid Russia using its veto against a draft UN resolution paving the way for the province’s independence (for analysis of the new Serbia government's policy on Kosovo, see "Serbia leader rejects Kosovo fallout fears".)
Jelasic conceded that stalled negotiations put further strain on the country’s economic prospects but explained that the medium term direction of monetary policy was totally dependent on the budget. “We call for a surplus or at least a balanced budget and a negative budget will be a bad surprise, but I have no idea what form the budget will take. We urge the government to carry out its promise to move to a more restrictive fiscal policy to provide more room for a less restrictive monetary policy”.
The budget, which has been delayed due to protracted negotiations with coalition members after the election in January, has to be passed by parliament by the end of June. But Martin Stelzeneder, economic analyst at Raiffeisenbank, told Emerging Markets “monetary policy is very difficult because no one has any idea what the fiscal target will be”. Jelasic conceded that interest rates would have to go up if there was a budget deficit this year. The central bank this year made the fifth successive cut to its repurchase rate, to 9.5%.
Jelasic was optimistic that, assuming a stable policy environment, the economy was in a good shape to undergo the necessary structural reforms: “the overall credit appraisal of the country is solely due to political instability. With the stabilisation agreement process in place, despite the fact there have been no talks for 13 months, we are confident we are in a good position to finish this.” But Stelzeneder cautioned against excessive optimism: “there has been no agreement so far - only talks about procedures for talks. The ultimate problem is the politicians and there is no sign that the most acute problem of cooperation with the Hague tribunal can and will be solved”.
Jelasic conceded that the central bank's determination to squeeze consumer credit has led to disagreements with commercial banks over the high level of monetary reserve requirements on domestic loans. “This was not ideal but we have no alternatives to put the brakes onto the economy. There are a number of things the government can do to help: take back the large salary increases, especially as there is overall agreement that salaries were too high; speed up structural reforms; and be cautious on election promises, for example don’t offer irresponsible tax breaks.”
The US-educated governor also agreed with the IMF’s assessment that the central bank needed to be more independent and could not confirm rumours that he will be nominated for another five-year term. “We definitely need a general overhaul of central bank law. In terms of my appointment, I have the support of senior government officials but different parties have different views about how the governor should be elected and who it should be, so I cannot be sure”.