SERBIA: GOVERNMENT ADOPTS 2009 BUDGET DRAFT

UNCLAS SECTION 01 OF 02 BELGRADE 001262

SIPDIS
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH

E.O. 12958: N/A
TAGS: ECON EINV ETRD EFIN SR
SUBJECT: SERBIA: GOVERNMENT ADOPTS 2009 BUDGET DRAFT

Ref: A) Belgrade 1222 B) Belgrade 1158

SUMMARY
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1. On Saturday, December 6, the Serbian government adopted its 2009
budget proposal and forwarded it to the Parliament after delays due
to disputes among ministers over resources. The government managed
to meet the IMF deadline - the December 19 IMF Board vote on the
Stand-By Arrangement with Serbia - and agreed to a consolidated
deficit of 1.5% of GDP. Despite a nominal increase in expenditures
of 7.5% over the rebalanced 2008 budget, the draft budget cut public
consumption's share of GDP from 45% to 43%. The Finance Minister
said the draft was a "rigorous" cut in public consumption, while
experts' opinions varied. The key test will be whether the economy
achieves the assumed 3.5% growth in 2009 and inflation is kept at
8%. End Summary.

Expenditures Up by 7.5%, But Share in GDP Down by 2%
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2. The Serbian Government finally adopted a draft 2009 budget on
Saturday, December 6, after several postponements following disputes
among ministers over appropriations, and sent it to the Parliament
for urgent adoption. The budget projected revenues of $10.38
billion, expenditures of $11.12 billion, and a deficit of $737
million. Although projected 2009 expenditures and revenues were
both up by 7.5% nominally over the rebalanced 2008 budget, the share
of public consumption in GDP was projected to decrease by 2% to 43%
of GDP. Also, despite a nominal increase in the budget deficit of
8%, the consolidated deficit as a percentage of GDP was projected to
decrease from 2% to 1.5%.

Basics: Growth 3.5%, Inflation 8%, EU Interim Agreement
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3. According to Finance Minister Dragutinovic the budget projected
that the worldwide crisis would hit Serbia in 2009 and although "it
is not possible to predict all effects on Serbian economy" the
assumptions included a slow down in GDP growth in 2009 to 3.5%,
inflation of 8%, export and import drops of 4.8% and 5.4%
respectively, and a current account deficit of 16% of GDP. The
proposed budget included: implementation of the Interim Trade
Agreement with the EU, cutting import duties on automobiles by half,
and government investment in the joint venture with Fiat of around
$254 million. The budget included implementation of the EU Interim
Trade Agreement after intervention by Economy and Regional
Development Minister Dinkic. Implementing the Interim Trade
Agreement added to the fall in customs revenues as the trade
agreement reduced import tariffs on a broad range of goods. To
compensate the government will hit Serbians pocketbooks with
increases in excise taxes on those things most dear to the average
Serbian cigarettes, coffee and beer, and an increase in car
registration fees. Excise taxes will also increase on oil
derivatives (gasoline and diesel).

Cuts in Subsidies, Increase in Pension Transfers
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4. Dragutinovic explained that public sector wages would increase
at the same rate as inflation while pensions would remain at
December 2008 levels (after the controversial 10% extraordinary
increase given in September). Major cuts were made in subsides to
utilities, agriculture, railways, and socially-owned companies from
$720 million to $609 million, capital expenditures from $876 million
to $594 million. On the other hand, budget transfers to social
insurance organizations (the Pension Fund, Health Fund and
Unemployed Fund) would increase by 30% from $2.66 billion) to $3.46
billion thus increase its share in total budget expenditures from
25.7% in 2008 to 31.2% in 2009. Added to wages and social
allowances, these transfers accounted for 70% of the budget.

Deficit Covered by Sale of NIS and New Borrowing
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5. The government proposed to cover the budget deficit of $737
million together with debt repayment of $636 million from
privatization revenues of $742 million, including revenues from the
sale of state oil firm NIS (ref A) and new borrowing of $301
million.

Finance Minister Satisfied, Experts Opinion Vary
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6. Finance Minister Dragutinovic stated at a December 6 press
conference that she was satisfied since the budget reflects
responsible state behavior and was extremely restrictive.
Economists' evaluations of the restrictiveness of the budget varied
significantly. Some praised the governments' attempts to restrict
spending growth, while others cautioned that the economic

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assumptions in the budget were optimistic.

COMMENT
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7. The Serbian government managed to adopt a budget proposal that
is at least nominally in line with IMF requirements. The pressure
of the IMF Stand-By Arrangement helped to focus politicians on the
difficult economic environment as some in the government had hoped.
At the same time, the internal battles and delays that postponed the
government meeting to adopt the budget highlighted the political
horse-trading required to bring the government's wide-ranging
coalition partners on board. Although the opposition parties
announced they would vote against the budget in Parliament, the
government should now have the votes to pass it. The real challenge
is only just beginning, as Serbia will implement a fiscally
conservative budget in the midst of the worldwide financial crisis
with the hopes of attracting sufficient international investment to
keep growth numbers at least barely positive. End Comment.

MUNTER