Serbia’s Fiscal Council warns of looming public debt crisis

Serbia’s Fiscal Council warns of looming public debt crisis
By Ivana Jovanovic in Belgrade March 3, 2016

The Fiscal Council of Serbia, an independent state body, said on March 2 that in order to prevent a public debt crisis the government must decrease the huge public deficit, and reform and privatise public companies. So far, the government is at best halfway to carrying out these tasks, the council said.

Serbia’s general government public debt reached RSD3,069bn (€25.23bn) or 76.8% of GDP in 2015, according to preliminary data from the finance ministry’s public debt administration. The Fiscal Council warns public debt could rise to over 88% of GDP if the government fails to carry out reforms.

According to the council, so far the government has made the most progress in downsizing the fiscal deficit mainly thanks to the reduction of pensions and salaries in public sector. Belgrade announced plans to cut public wages and pensions by approximately 10% in November 2014, though a small increase was announced a year later.

In 2015, Serbia managed to bring its deficit significantly below the ceiling envisaged under the precautionary €1.2bn three-year stand-by arrangement (SBA) with the International Monetary Fund (IMF). Under the SBA, the country’s deficit was expected to reach RSD232.1bn but the IMF decreased its forecast to RSD162.1bn in November 2015, after the third review of the SBA.

“The deficit is not enormous anymore, it has been diminished by 6.6% of GDP from 2014 to 3.7% of GDP in 2015 but is still unsustainable because public debt has not stopped growing and it is not possible to reduce it significantly without additional serious and unpopular measures,” the council said on March 2.

According to the council, in order to avoid any financial uncertainty or crisis, the fiscal deficit of the general government needs to be reduced by some 3% by the end of 2017. The budget deficit needs to drop to below 2.7% of GDP at the end of 2017 from over 4% of GDP at the end of 2015. A gap of 2.7% of GDP would be the level at which public debt would stop rising. This means that the government has to find a way to permanently downsize the budget gap by over €500mn within the next two years.

Like the IMF, the Fiscal Council criticised the government over the privatisation process and reforms of state-owned giants - gas monopoly Srbijagas, power utility EPS and Serbian Railways.

Serbia has been trying to restructure some 500 public companies and has promised to stop financially supporting them, but the process faces numerous obstacles as it requires a significant reduction of jobs and thus increases the risk of the government losing popular support.

“At first sight, [the government’s] management of the destiny of companies undergoing privatisation looks impressive, but those were mainly companies with a small number of employees, and some two thirds of employees remain in companies with unresolved status where important challenges can be expected,” the council said.

According to the council, the least progress was made in reforming large public conglomerates, of which only the state railways operator has started the process. Nothing has been done to reform EPS or Srbijagas so far, the council stated.

“These reforms are vital to improve Serbia’s competitiveness, growth and employment. 2016 is a critical year for the reform of EPS, Srbijagas and the railways [operator], and a new government will need to move rapidly to implement restructuring plans for these entities,” James Roaf, who led a recent IMF mission to Belgrade, said on February 27. Reforms to gas monopoly Srbijagas, power utility EPS and Serbian Railways are crucial for the success of the SBA, he added.

Prime minister Aleksandar Vucic decided to hold early elections just two years after the previous early elections in March 2014, in what appears to be an attempt to ensure he has a strong mandate to carry out potentially unpopular reforms including the closure of public companies.

The elections will be held just a month before 17 key firms are due to lose court protection from creditors, which was extended by up to a year for firms of particular importance to the economy in May 2015.