Serbia needs to implement additional savings worth around EUR 300mn or 0.8-1.0pps of GDP in 2014 in order to curb its rising budget gap and put the public debt on a sustainable footing, the country’s fiscal council said in a report published on its website on November 26. The planned total deficit of 7.1% of GDP (including the payment of activated state guarantees, spending on saving troubled banks and companies) next year is too high and is among the highest in the CEE region, the report underscored. Serbia’s 2014 budget gap will increase by around 0.5pps of GDP compared to this year mainly due to payments of obligations related to troubled state-owned enterprises and failed banks, the report reads.

The Fiscal Councils noted that the government’s new set of austerity measures proposed in early October will not be enough to curb the rising budget gap and stabilize public debt growth by 2016. The latter will earn savings ranging from 1.0 to 1.2% of GDP instead of the expected 2% of GDP. According to the government’s fiscal strategy published earlier this year, the budget gap is seen narrowing to 5.2% of GDP in 2015 and to 3.2% of GDP in 2016 mainly due to lower debt servicing costs and employment expenditures. The Fiscal Council considers that this deficit reduction trajectory is not supported by credible measures.

The Fiscal Council urged the government to speed up key structural reforms such as the pension reform, to restructure state-owned enterprises, and impement additional savings of up to 1pps of GDP.

The Council added that nothing has been done so far to solve the problem with state-controlled banks and large loss-making enterprises such as gas supplier Srbijagas, drug maker Galenika and steel mil Zelezara Smederevo. The assessment is adding additional pressure to the government to implement the announced restructuring plan of state-owned enterprises by end-2014. The latter are expected to cost some EUR 600mn to the budget next year, equaling to 1.7% of the GDP, the report read.

The Council also said Serbia will have to borrow an average EUR 5bn per year to finance its budget gap and service its debt in the next 5 years, adding that the country must reach an agreement with the IMF in order to guarantee foreign investors’confidence in its economy while dealing with outstanding fiscal issues.

The Fiscal Council is elected by the parliament and is legally obliged to provide an independent assessment of the government's economic policy.