Serbia's revamped govt faces economic revival, EU accession tasks

By bne IntelliNews September 5, 2013

Nicholas Watson in Prague -

Serbia's reshuffled government met for the first time on September 3 as it faces the twin tasks of securing the economic recovery and the Balkan country's accession to the EU.

Serbia's parliament late on September 2 approved the new cabinet of Prime Minister Ivica Dacic in a 134-65 vote, following three days of heated debate. The new cabinet emerged from a long drawn-out reshuffle of the year-old, three-party coalition, which ultimately saw Dacic oust the-then finance minister Mladjan Dinkic and his small, fiscally conservative URS party. This angered Aleksandar Vucic, deputy PM and the powerful head of the largest party in the coalition, the Serbian Progressive Party, though not enough to cause the coalition to collapse and force early elections.

Dacic, who heads the Serbian Socialist Party, argued that Dinkic's fiscal hawkishness was holding back the recovery of the country's struggling economy, which is suffering from rising twin deficits of the budget and public debt, as well as high inflation and unemployment. "Our primary goal is to stop the economic downturn and create new jobs," Dacic said of the new cabinet.

The reshuffled government has 11 new ministers, though the key appointment is the US-educated Lazar Krstic as the new finance minister. This Yale-educated, 29-year-old was until his shock appointment by Vucic employed by the global management consultancy McKinsey & Co - a source of several cabinet appointments by this government.

One government source called Krstic "uber-smart", though expressed some concerns about whether the relationship with Vucic could end in tears if the latter finds it hard to control him.

Others worry about his simple lack of experience swimming in the shark-infested waters of Serbian politics - something his predecessor Dinkic was immersed in having served in several governments in the years since the autocrat Slobodan Milosevic was ousted in 2000. "I wonder how good Krstic will be at navigating the waters of Serbian politics - he spent the better part of the past decade outside the country. His networks and insider knowledge of party politics are likely to be less than those of his in-country based peers," says Otilia Dhand, vice president of Teneo Intelligence. "It is a very intriguing nomination indeed, and I am looking forward to following his fortunes."

Krstic certainly has his work cut out for him. Dacic might've been hoping that getting rid of Dinkic would rid the government of its bent toward trying to streamline the public sector, but the opposite may occur. In fact, no government has yet found the courage to make inroads into cutting spending to the country's pensioners and state employees, which make up about one-third of Serbia's electorate. But while Krstic has yet to outline his plans, he has already talked of "belt-tightening" and bringing the budget deficit down from last year's 5.7% to below 4.0% next year.

Cutting the budget deficit is key to renegotiating a stand-by loan deal with the International Monetary Fund (IMF), Krstic's other big job. Securing such a deal is crucial to giving investors confidence in this country, which has huge potential but a dodgy past. The IMF froze the previous €1bn deal in 2012 because the previous Democrat government led by former president Boris Tadic couldn't stick to commitments that the budget deficit in 2012 should not exceed 4.25% of GDP and public debt 45% of GDP. In May, the IMF warned that without additional budget consolidation measures, Serbia's 2013 budget deficit would hit 8.0% of GDP and public debt hit 65% of GDP, up from 62% in 2012.

The Serbian economy is projected to expand by 2.0% in 2013 after contracting by an estimated 1.8% in 2012. That gives Krstic something to work with, but given expected lower tax revenue and more unbudgeted spending, spending cuts of the size so far not seen will clearly be needed.

The other key appointment is that of Tanja Miscevic, who will be the chief negotiator in the country's talks with the EU about joining the bloc. Serbia formally became a candidate for EU entry earlier this year after the former nationalist Vucic managed to bring the country on board with normalising relations with its erstwhile province Kosovo.

Miscevic said in a recent interview that the path toward EU membership will be a long and painstaking one, and few believe this government will be in charge when the talks come to their conclusion.

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