INTERNATIONAL MONETARY FUND
OFFICE OF THE RESIDENT REPRESENTATIVE IN SERBIA
KRALJA PETRA 12
11000 BELGRADE, SERBIA
Interview of the week: Peter Doyle
Strong budget, stable Serbia *
Politika Daily, March 18, 2007
Journalists Rodoljub Geric and Biserka Dumic
Excessive wage increase can create big problems, claims Peter Doyle, IMF Chief of the
Mission for Serbia, convinced that the privatization is the best solution for unemployment
We urge the new administration to choose the better path, difficult as this will be.
Delayed action will spur further wage rises, boost imports and external debt further,
jeopardize low inflation, and ultimately undermine economic growth. It can be done. Delay
will raise the risks considerably. Now is the time to act.
This is the quote from the Aide Memiore communicated by the IMF’s Mission to our
authorities after last week’s visit to Belgrade. For Politika’s readers we have asked Mr Peter
Doyle, Chief of the Mission to Serbia, for comments on central conclusions of IMF’s expert
team.
What are your impressions after you have had talks with representatives of the
key state and financial institutions in Serbia?
I think you know well without me having to tell you Serbia still faces many
challenges. The main conclusion that we have reported in our paper is that there is very big
need to restructure state and socially owned enterprises and that means, privatizing. Those
that can not be privatized should go to bankruptcy in order to release resources back to the
economy where they can be used more productively. And in our view, without this moving
forward in ambitious and aggressive way, prosperity in Serbia is not secured.
What are our biggest weaknesses that you wanted to point out to us?
There are various issues and at the most immediate is that the temporary finance
arrangement expires and the end-March, so there is need for action quickly to solve that. Our
view is that proper solution, or the best solution, is to extend the deadline another three
months, and the main reason for that is obviously that is important for government
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expenditure not to stop completely: pensioners need their pensions; civil servicemen need
their wages and so on. But we also think that with the draft budget for 2007, which is in the
parliament, is not good and it is not good solution to rapidly adopt that budget, even if that is
politically impossible to do. We think that an extension of the budget deadline for three
months would give some time to the coalition to form and determine good budget policies.
On the other side, why we think that the draft budget 2007 is not good is that it anticipates
very large budget deficit and we do not see that that is good for Serbia now.
In your view, how should Serbian budget look like, keeping in mind the real
possibilities as well as means; is a budget surplus a real option?
We have to consider what the word ‘real’ means. I am not saying that this is
politically easy and that it could be made without an effort. What I am saying is what the
macro circumstances in Serbia requires and that means that if it doesn’t get done, then the
macro environment in Serbia will deteriorate further. A very large external trade deficit will
get even bigger and ultimately will threaten the sustainability of the whole country.
Therefore, a strong budget is an important element of policies to keep Serbia stable.
Three is only one element as I mentioned before, central, core element, is
restructuring of companies. And let me be very plain about that: if Serbia delivers a very
strong budget, a budget surplus, but it doesn’t deliver a restructuring of companies -- and
here I am talking about so called ‘big’ companies such are NIS, EPS, but I am also talking
the remaining socially owned enterprises, which are considerably inefficient and employ a
very large poll of labour -- it would be no surprise that overall economic performance in
Serbia faces serious problems.
You have warned that if the government continues to increasingly spend the
money, a budget deficit may arise. How can the new government reduce public
spending, and at the same time deal with the progressively increasing requests for
public wage increase?
It is important to be clear what the problem is. Of course, everybody wants a higher
pay but it is only sustainable if it is earned. But in 2006, everybody in Serbia awarded them
selves a pay rise, a big pay rise, but it wasn’t earned. So how is that possible? And the answer
is: when the households went to spend their wages they couldn’t buy Serbian products
because these Serbian products were not being produced but imported. Up goes the trade
deficit financed by borrowing from abroad. Current account deficit, trade deficit, as a part of
external debt goes up, and it is not sustainable at the level of the economy.
Therefore, when you say what needs to be done, again, my first answer is structural
reforms. Now that the pay has been elevated, it has to be earned. And how do you earn it?
You earn it by being more productive. But how do you become more productive? By closing
old companies that make looses and work inefficiently. They need to change operating
procedures and become more efficient, need to introduce competition into sectors where
there is no competition, and all that to get productivity up to the level of pay. That is the
fundamental first answer.
What do you think about our National Investment Plan?
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Even thought there is a need for interments in several areas in Serbia, we believe that
the main problem is that that National Investment Plan (NIP) is not from fully planned from
the point of view of the economy. If you ask why is this project chosen and not the other one,
the answers are not clear. More to the point, the plan is created completely independently of
budget, which means that there is no possibility of clear determination of the priorities. In our
view, this program needs to be completely rethought before further action, because there is a
room for public investments in Serbia and a need for their implementation.
You have had talks with Governor Jelasic. How do you see central bank’s
policy?
In our view, it is a major success is that the inflation is so low. Until recently, Serbia’s
inflation was 10-15 percent, while in neighboring countries one to two percent. Serbia for a
long time has been the worst regarding inflation rate, but now is closed to the regional level.
The core objective of the Central bank is to secure low inflation and that is the main
challenge for the NBS, but to do that, structural reforms are needed.
Do you think that our national currency is too strong?
Serbia needs very aggressive structural reform supported by a very strong fiscal
reform. If somehow the Dinar would to depreciate, and you didn’t had the strong fiscal
policy and you didn’t had the strong structural reforms nothing would be resolved. All you
get is inflation.
What about interest rate? There are opinions that it is too high.
You are aware that the NBS’s instrument -- the repo rate -- has declined very much in
past year, and that has been made possible by the fact that the inflation rate went down. If
you are of the opinion that the interest rates are still too high, you must ask your self why is
so and what is keeping them so high. You don’t have strong structural reforms, the fiscal
policy is too weak, the wages are too high and in that environment it is not possible to lower
interest rate progressively.
Unemployment is a serious, maybe the most difficult problem. How can we solve
it?
Unemployment is a serious problem and I think that the only serious answer to that
are privatization, bankruptcy and structural reforms. Sounds like something of a surprise -many people think that when you privatize the first that happens is the lost of the jobs and
that there is more unemployment. But that is not what happens -- in the number of cases
when you have restructuring and particularly the companies which are sold to the new
strategic partners, they can flourish and very quickly grow number of employees and
productivity. Nevertheless, privatized companies indeed had to downsize number of workers,
and those workers need to move to other more productive sectors of the economy. The part
of the solution has to be privatization and restructuring precisely because that creates the new
employment companies and gets economy growth. Then the second most important thing is
the problem of social safety nets so that while people are unemployed so that they can have
incomes and still search and find new work. The third key element is that you need to have
new private investments into economy and the best way to get that is through strong
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structural policy, good budget policy and stable currency -- all of these provide reason for
investors who never been here before to come and that is the way to provide new
employment for people.
In your view, what is the biggest success so far when analyzing the reforms?
Over the past three to four years three has been significant progress – GDP growth
was good, inflation came down, certain structural reforms were implemented and some
enterprises were sold. On the other side, a VAT was introduced. These are major
achievements and those were not easy to do.
And what are the worst results?
The fact that the wages went up to much and that the budget is too weak. These are
two most important problems.
Is the new administration obliged to accept your recommendations?
This discussion that we had during this mission is not a negotiating. Serbia no longer
has a program with the Fund, and what we are doing is exchanging the views on various
issues. It is up to the authorities of Serbia when the new administration is formed to decide
how much will accept.
What are your suggestions to the new administration?
The main thing is – do not delay more. What is needed is early implementation of
very strong economic policy and that would be easy with the formation of the strong
government.
Does Serbia need a new loan from the IMF, a new arrangement?
Right now no, in a sense of finance from the IMF. There is a still a role that we can
play and offer an advice for economic policy and that one of our functions that we can do
right now. As you already know, there are various voices to whether Serbia could use the
new arrangement with the IMF.
The IMF is often seen as a global financial watchdog. Do you feel like such, like
financial policeman?
Yes, I agree that there is a view that IMF serves to ensure the discipline. However,
you have raised here an important question, because there is only need for the IMF to apply
discipline if Serbia does not apply discipline to itself. As any other member country of the
IMF, Serbia should discipline itself. I hope very much that Serbia will begin to do that soon.
Would IMF accept membership request from Kosovo before determination of
the final status?
A country becomes a member of the International Monetary Fund at the point when a
majority of the other members of the IMF recognizes it. I can illustrate it with the example of
Montenegro, our newest member. When Montenegro declared independence, and when that
issue was clear in form of recognition, it was open for Montenegro to apply for the
membership. The rules are that other countries recognize new country to have a right to
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become a member of the Fund. Тhat is not decision of the staff of the Fund, it is not the
decision of the Fund’s management, it is not even strictly the decision of the Executive board
of the Directors. It is the decision of all the other countries. They decide when the conditions
are right for the new member of the Fund.
Is the membership at the IMF associated with the membership at the UN?
There is a mix of legal and diplomatic elements in membership issue at the IMF.
Whether or not the particular new country like Montenegro is the member of the UN is one
of the factors which country use, but there are other factors as well. So, there are no simple
and easy answer. In the case of Montenegro, nobody contested it, not even Serbia. When the
majority of countries endorse some country to become a member -- a whole application
process is initiated.
*
This paper should not be reported as representing the views of the IMF. The views expressed are those of the
author and do not necessarily reflect the views of the IMF.