By Sid Verma
As Kosovo tension flares, Serbia’s central bank chief is fighting hard to keep the focus on economic stability
Political tensions continue to rise over Kosovo, and National Bank of Serbia governor Radovan Jelasic needs to hold the line and try to return the government’s attention to economic stability. He is “confident” that the negotiations for an EU stabilization agreement, which restarted in mid-2007 after a 13-month diplomatic delay, can be brought to a successful conclusion. “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,” he tells Emerging Markets.
In September 2007, Jelasic was reappointed as central bank governor until March 2009, by an overwhelming majority of 132 votes to 19 in parliament, although the hard-right opposition Serb Radical Party (SRS) did not participate. The SRS, Serbia’s largest party, which has been kept from power by a coalition of more moderate groups, has criticized Jelasic for his economic orthodoxy and respect for IMF and EU conditionality.
The government worked with a temporary budget until June 2007, as parties struggled to form a coalition. However, this stalemate, together with the ongoing focus on the future of Kosovo, has prevented any meaningful structural reforms. In addition, a round of public-sector wage hikes that took place before the elections in January 2007 has fuelled inflation, forcing Jelasic to hike the benchmark rate by 25 basis points in August, to 9.75%, as well as adopting other administrative measures.
Jelasic concedes 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.” Optimism
Nonetheless, he remains optimistic that, assuming a stable policy environment, the economy is in good shape to undergo the necessary structural reforms: “The overall credit appraisal of the country is solely due to political instability.” After several warnings, the ratings agency Standard & Poor’s lowered the outlook on its BB- sovereign rating on Serbia to stable from positive in July 2007, although in practice it cited deteriorating current account and fiscal positions, in addition to political uncertainty over Kosovo, as its justification.
The US-educated governor says he backs IMF calls to reinforce central bank independence, and the government has responded by preparing a new draft law on the national bank, which will be put to parliament sometime in the fourth quarter. But analysts have voiced concerns that one of its provisions, to widen the board of the central bank, could be a cover for introducing more political influence to monetary policy-making, rather than enhancing independence.