Serbia’s cooperation with the international community on the arrest of Ratko Mladic – the Bosnian Serb general who tops the wanted list at the war-crimes tribunal in The Hague – has long loomed as the biggest stumbling block in the country’s bid for a future in the European Union. However, Serbia’s acquiescence on another foreign demand – meeting prescriptions for sorting out its economy – has resulted in a backlash from Belgrade’s top bankers.
The central bank’s IMF-inspired monetary policy is meeting with growing opposition from the private sector. In the latest of its moves to stem inflation, the National Bank of Serbia (NBS) raised its mandatory reserve requirement for foreign borrowing and short-term deposits under two years to 40% in April.
serious doubts
A wave of outrage has since swept across the country’s rapidly-expanding banking sector. “The problem with the IMF’s policy is that it looks good on paper, but once it is applied in real life, it gets distorted,” says Vladimir Cupic, main board member of Hypo Alpe-Adria-Bank in Belgrade.
Cupic doubts the effects of the governor’s ever more restrictive monetary policy. “Monetary policy has used its resources, it cannot contribute any more to the reduction of inflation. I think that the basic reasons for inflation are predominantly public spending and slow structural reforms. Meanwhile, interest rates are going up and regulatory costs are the key driver of this,” he says.
Inflation stood at an annual rate of 15.6% in April this year, down from 17.7% at the end of 2005. Current IMF estimates predict a rate of 11.5% at the end of 2006. The Fund, however, is calling for more stringent measures to keep price risks at bay.
Harald Hirschhofer, the IMF’s resident representative in Serbia, admits the need for structural reforms but rejects claims that not enough is being done on fiscal policy. He points to the government’s commitment to maintain a combined budget surplus of 3.6% of GDP for the 2005/06 period.
The Washington-based lender has warned about the country’s current account deficit, which stands at 10% of GDP. Of equal concern is the unprecedented growth in consumer lending following successful liberalization of the banking industry and the mass entry of foreign banks – private-sector loans doubled last year. In a sign that the warnings are getting through, central bank governor Radovan Jelasic says that he is not prepared to allow a similar rise in 2006.
The IMF way
The IMF unsurprisingly defends its monetary advice. “On monetary policy, clearly you have challenges with the high euro-ization of the economy and the very strong capital inflows which make monetary policy difficult,” says Hirschhofer.
Apart from the reserve requirements, Hirschhofer is also pushing for high real interest rates for the NBS’s repo operations. He praises the central bank’s tightened prudential regulations aimed at curbing risky household lending and points out that the effects of the reserve requirements are perfectly quantifiable.
According to NBS figures, by the end of February 2006 some CSD195.5 billion ($3 billion) had been taken out of the system by use of the mandatory reserve requirement and an additional CSD32 billion through repo operations. April’s increase in reserve requirements was estimated to have sterilized a further CSD13.7 billion.
Governor Jelasic fears that by raising repo interest rates too high, he may be courting an inflow of speculative money which would render the increase self-defeating. Raising reserve requirements this month was aimed at such speculative capital inflows to the country.
unhappy bankers
The banking sector, however, is up in arms. Oliver Roegl, chairman of the managing board at Raiffeisenbank in Belgrade, objects to the blanket application of the reserve requirement to all types of lending. “There should be differentiation because if the main target is to curb
consumer lending, why should you hit companies which are exposed to international competition?” he asks.
“Here in Serbia you have high country risk, BB-, and in addition to that the artificially-increased costs of monetary restrictions. It really puts the local companies at a disadvantage versus the foreign competition.” He estimates these extra costs at 300bp-450bp, although due to increased competition in the banking sector much of the hit has been to bank margins.
Because large corporations have access to cross-border borrowing, both Cupic and Roegl are particularly concerned about the effect on SMEs and knock-on negative effects on economic growth and unemployment, which stands at over 30%.
red tape
Hirschhofer, however, downplays these fears. “The problem of SMEs and associated job creation is that there is still too much red tape, too much bureaucracy, and access to real estate is difficult,” he says.
Roegl believes that, “with appropriate measures, funding costs can be brought under control relatively quickly. ”
Hypo Alpe-Adria-Bank’s Cupic also protests at the central bank’s use of provisioning based on balance sheet criteria, as another way to curb lending. “The policy is very rigid,” comments Cupic, “and it is having a serious effect on the growth of SMEs.”
Here, Hirschhofer has more sympathy, saying that the central bank should move “increasingly towards a real risk-based assessment and not really a compliance-based assessment”.
Hirschhofer has the final word for those concerned about damage to the banks’ margins: “The banks have been very profitable, the foreign private banks in particular. The reality check is: if banking is so horrible here, why does everybody want to come?”