SERBIA: 2009 BUDGET REBALANCE ADOPTED

UNCLAS SECTION 01 OF 02 BELGRADE 000383 SIPDIS USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH E.O. 12958: N/A TAGS: ECON EINV ETRD EFIN SR SUBJECT: SERBIA: 2009 BUDGET REBALANCE ADOPTED Ref: Belgrade 352 SUMMARY -------------- ¶1. The Serbian Parliament adopted a rebalanced 2009 budget on April ¶29. The rebalance reflected the deteriorating economic situation and adjusted for lower than projected 2009 revenues and expenditures, due to falling revenue collection by the government. The central government deficit increased from 1.5% to 2.3% of GDP, while the consolidated deficit went up to 3% of GDP. The biggest obstacle to adoption of the rebalance was the Alliance of Vojvodina Hungarians request to increase funds allocated to the autonomous province of Vojvodina. Finance Minister Dragutinovic presented the budget as a means to soften the consequences of the recession caused by global crisis. Opposition parties rejected the rebalance as "unrealistic and unsustainable." The budget rebalance meets the IMF's criteria, but the government faces the difficult task of holding to the promised spending cuts. End Summary. Budget Rebalance: Expenditures and Revenues Fall -------------- --- ¶2. The Serbian Parliament adopted a rebalanced 2009 budget and a set of accompanying laws on April 29 by a narrow majority of 127 to 16 (the budget needed support from half of the 250 parliamentarians to pass). The rebalance reflects the government acknowledgement of the reality that Serbia will be in recession during 2009 due to the global crisis. The budget rebalancing decreased both revenues and expenditures based on the revised 2009 GDP projections - a 2% fall, rather than the previous 3.5% growth. Revenue projections fell by 7% to $9 billion, while expenditures were decreased by 4% to around $10 billion, thus increasing the budget gap by 41% to approximately $1 billion. Inflation projections for 2009 increased to 10% from 8% annually. Opposition: Rebalance Unrealistic, Overly Optimistic -------------- -------------- ¶3. Finance Minister Dragutinovic presented the budget as "one of the tools to soften the recession caused by world economic crisis" and said that the government tried to cut administration costs, support production and infrastructure projects, and preserve living standards for the poorest Serbs. Although the opposition submitted 720 amendments to the rebalance package, under the new rules of procedure adopted in February the Parliament was nonetheless able to pass the entire package in less than a week. ¶4. Opposition parties criticized the rebalance. A Liberal Democratic Party (LDP) parliamentarian claimed that it would place the burden of the crisis on the middle class. Cedomir Jovanovic (LDP) criticized the government's entire economic policy, claiming that the LDP, "could topple the government and have elections but after that there would be an even bigger hole waiting for us." Jovanovic requested greater consultation with the opposition. Nenad Popovic from former Prime Minister Kostunica's Democratic Party of Serbia (DSS) said that the budget was "created by the IMF," that the government had spread unrealistic optimism, and that in the fall the situation could become catastrophic. Zoran Sami (DSS) complained about the decrease in the education budget and because funds for Corridor 10 (a regional highway) were cut from $69 million in the original 2009 budget to zero. (Serbia is now using loans to fund Corridor 10.) Leader of the Serbian Progressive Party (SNS) Tomislav Nikolic claimed that the measures were unrealistic and his party colleague Jorgovanka Tabakovic criticized the deficit and the additional borrowing in the budget. The Key Problem - Vojvodina Budget -------------- ¶5. Interestingly, the biggest challenge in passing the budget rebalance was the position of the four MPs of the Alliance of Vojvodina Hungarians (SVM),who are members of the ruling coalition. The SVM said they would not support the budget unless the Government set aside 7%, as stipulated in the Serbian Constitution, for Vojvodina instead of 5.7%. In the lead up to the vote, Prime Minister Cvetkovic reached an agreement with Bojan Pajtic, President of the Executive Council of Vojvodina to transfer additional funds. Via a teleconference, members of the government adopted the agreement to set aside an additional $90.3 million and thus achieved the 7% figure in the last hour before parliament voted. COMMENT -------------- ¶6. The urgent adoption of the revised 2009 budget was necessary to secure the IMF Board's approval of the new $4 billion Stand-By agreement with Serbia, currently scheduled for May 11. This revised budget buys the government time to adjust to the economic crisis and to seek additional financing from abroad, but may come at a BELGRADE 00000383 002 OF 002 significant social and political cost. While the government may be able to use international loans for certain key infrastructure projects such as Corridor 10, spending constraints will likely prevent it from satisfying demands for increased social spending, limit its ability to stimulate the economy and bail out struggling businesses, and force layoffs of government personnel - all leading to rising public discontent. End Summary. MUNTER