Serbia Public Debt Poses Trouble

By Ivana Jovanovic

The growth of Serbia’s debt in 2011 to the legal limit set by the IMF is raising concerns about the nation’s economy, as it attempts to avoid stagnation in 2012.

Serbia’s Central Bank (NBS) and the ministry of finance use different methods to calculate the country’s public debt relative to gross domestic product (GDP). In the first three quarters of 2011, the public debt rose to 46.7% of GDP, or 15.7 billion euros, according to the NBS.

The finance ministry sets the figure at 44.3% of GDP. The IMF has set the limit at 45% of GDP.

According to Bloomberg News, Serbia’s fiscal council has cautioned that falling demand in the EU, Serbia’s primary export market, is expected to decline in 2012, further threatening GDP growth. The council suggested possible remedies could include a freeze on public wages and pensions, Bloomberg reported.

Serbia’s Fiscal Council Chairman Vladimir Vuckovic explained to SETimes that the 45% limit is an ordinary quotient — the public debt is the numerator and the GDP the denominator.

“The NBS and the finance ministry use the same value for the numerator, i.e., the public debt … but the difference is in that with which they compare the public debt, the GDP. The ministry uses for the GDP the value generated during the whole calendar year 2011. The NBS uses the value for the GDP created in the previous four quarters, calculated from September 2010 to September 2011,” Vuckovic said.

Although Governor Dejan Soskic had announced this difference will be significantly reduced by the end of last year, in case the final ratio is closer to the NBS data, the government must develop a repayment plan to get the public debt below 45%, while the fiscal council must analyse it and communicate to parliament whether the plan is credible.

According to Vuckovic, the fiscal council must add to the debt issued by the finance ministry the local governments’ “not guaranteed debt”.

Economics Institute Director and former Economy and Privatisation Minister Aleksandar Vlahovic said that for a better insight into the true situation, one must look at the status of private debt. When summing up public and private debt, Serbia’s total debt would be more than 70% of GDP.

“The state does not provide a sovereign guarantee for private debt and that has nothing to do with public debt. Then again, the inability to repay the private debt puts into question the capacity of the economy — if private companies are not in a position to repay their debts, then they have liquidity crisis, which, if nothing happens, leads to bankruptcy,” Vlahovic said.

He added that the total public revenue will be challenged because it is collected by taxing industry.

He explained that the essence of the current situation is not that public debt will exceed the 45% limit, the essence is the reality that it is moving very close to it. The limit is appropriate to the existing capacity of the economy and projected GDP growth as well as to the Serbia’s capacity to borrow.

A multi-year budget deficit contributes to the rapidly-growing public debt in Serbia because the latter arises from the need to finance the deficit. Since the state does not have its own funds, it is forced to incur debts.

“If we cared about income and expenditure on time, we would not have deficit, not even fast-growing public debt. On the revenue side, we perhaps had the opportunity at the beginning of the crisis, and perhaps even earlier, to conduct a tax reform. On the expenditure side, it is a question of savings and reforms behind the savings policy,” Vuckovic said.

He explained that delaying public sector reforms [concerning] employment, procurement, subsidies, education, healthcare, police, and the military should create room for less expenditures contributing to a bigger deficit and growing public debt.

Professor Dejan Eric, director of the Institute of Economic Sciences, told SETimes there are two important issues regarding the public debt.

“First, last year the debt enormously increased and the golden rule of public finances was violated i.e., public debt was not used for investment, but for current consumption. Second, Serbia approached the upper ‘acceptable’ debt limit and that continuing uncontrolled borrowing can lead the country to excessive indebtedness,” Eric said.

To avoid the worst case scenario, that is, putting in question the country’s external liquidity — ie, its ability to continue paying its obligations from 2013 on — which can happen if the government continues to borrow, it is necessary to complete the transition and reformation of companies, pension funds, tax policy and public administration, but also to rationalise spending.

“We now need a stabilisation policy as well as partial privatisation. Foreign capital should be introduced through various forms of partnerships, not necessarily privatisation. Pension fund reform is a separate chapter; perhaps raise the average limit for retirement to 67 to reduce the burden on this fund,” Vlahovic said.