Serbia's central bank governor jumps before he's pushed

By bne IntelliNews August 3, 2012

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In a case of jumping before being pushed, the governor of the National Bank of Serbia (NBS), Dejan Soskic, resigned August 2 amid a welter of condemnation from international quarters worried about the independence of the central bank. Yet this is not unusual - newly installed Serbian governments have a track record of removing central bank governors; Radovan Jelasic was dismissed in 2010 in similar circumstances following a dispute over spending policy.

A war of words had broken out between Governor Soskic, appointed by the previous Democratic Party government, and Serbia's new government led by the Progressive Party of President Tomislav Nikolic and the Socialist Party of Serbia led by Prime Minister Ivica Dacic.

Dacic, a one-time foul-mouthed political bruiser in the former dictator Slobodan Milosevic's government of the 1990s, has made it plain he supports loosening the government purse strings to try to get Serbia's faltering economy moving again, which in the second quarter shrank 0.6% from the same period a year earlier after a 1.3% decline in the first quarter. To embark on expansive fiscal policies to boost economic growth the government needs the cooperation of the NBS governor to achieve this.

However, Soskic has run a restrictive monetary policy that was aimed at holding down inflation, and he and others warn that Serbia's finances are moving in the same direction as Greece's, and have called for fiscal restraint.

Serbia will require an additional €2.5bn to finance its liabilities this year. With its year-to-date deficit totalling some €687m (equivalent to 7-8% of its GDP), Serbia's budget deficit remains considerably higher than that agreed with the International Monetary Fund (IMF), whilst its public debt now stands at 46.7% of GDP, above the IMF-stipulated limit of 45%. As a result, the IMF's €1bn standby loan deal is now on hold.

Pushing Soskic out will do little to secure that IMF deal. In a statement, Soskic said he had resigned because draft amendments to the laws governing Serbia's central bank being pushed by the new government and before parliament "violate the independence of the National Bank of Serbia" and would degrade decision-making.

In a statement, the IMF criticised the draft central bank law that many feel the government drew up as a way to oust Soskic and keep a tighter rein on his successor as a "major weakening" of the bank's autonomy. The IMF said proposed amendments permitting central bank purchases of securities issued by the government or other public entities on the secondary market "allows, de facto, indirect monetary financing of the public sector, which would pose serious risks for the foreign exchange reserves of the NBS (National Bank of Serbia) and the exchange rate."

Indeed, this proposed legislation to allow the NBS to buy government securities and those issued by public bodies will, say critics, merely allow the use of the bank's funds to fill Serbia's empty public coffers.

"Under the proposals announced, a supervisory body, appointed by parliament, would be charged with taking a more 'active role' in deciding the direction of monetary policy. This could have negative consequences for relations between IMF negotiators and the Serbian government officials," says IHS Global Insight.

IHS Global Insight says a clear favourite to replace Soskic has already emerged from the pack of potential candidates in the shape of Jorgovanka Tabakovic, a senior member of the Progressive Party and a qualified economist. "Monetary policy under the new appointee is likely to be adjusted to suit the government's economic strategy," it says.

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