Friday, March 27, 2009

IMF Grants Loan to Serbia

Sources: Financial Times, Serbia and IMF Seal €3bn Loan; BBC, Serbia Secures IMF Emergency Loan

The IMF and Serbia have agreed on a loan package that will extend a standby credit of $4.1 billion over a two-year period, but the money comes with strict conditions. Like other countries in the region, Ukraine being one notable example, Serbia may have trouble adhering to the conditions placed on the loan, especially considering societal expectations of public spending in the formerly socialist country.

There is some leeway in the conditions – for example, the agreed-upon number for the budget deficit is now three percent, as opposed to an earlier agreement at one and a quarter percent. Major discretionary spending cuts will be necessary, but not social spending cuts. However, there will be a temporary six percent surcharge tax on all incomes, in addition to an existing two-year freeze on nominal wages and pensions. The government will try to protect its poorest citizens by doubling the minimum threshold income needed to qualify for regular income tax, but the surcharge will be painful for many Serbians.

This package replaces the initially-agreed-upon €520 million standby loan, negotiated in January, which Serbian officials had hoped not to need at all. However, as the economic picture worsens, it is evident that Serbia will need access to funding and will have to swallow the IMF's conditions to receive it. The IMF expects Serbian GDP to contract by two percent in 2009, and to remain at the same level through 2010. The loan, in turn, will strengthen currency reserves and stabilize the slumping dinar. Once Serbia meets the necessary conditions, the loan is expected to go through final IMF approval in May.

Questions:
1) Do you think this crisis, and the IMF loans to emerging economies that have come out of it, will affect the expectations of people living in the former Eastern Bloc regarding public spending and significantly change public attitudes towards government support for its citizens?
2) Do you think the IMF's conditions on Serbia and other emerging economies are reasonable in this crisis, or are they incompatible with a government's desire to boost the economy through spending?

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