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Serbia Fights Against National Bankruptcy

Published: October 9, 2013; 07:06 · (Vindobona)

The Serbian government has decided to implement a new austerity package. Above all, civil servants face substantial salary cuts.

Serbia Fights Against National Bankruptcy / Picture: © Vindobona.org

The government of the Balkan nation warns of a national bankruptcy. At the moment, the country has only very limited access to bond markets. However, Serbia has a financial requirement of more than € 4.0bn until June 2014.

One of Serbia´s main problem is the persistently high budget deficit. This year, the country is expected to reach a fiscal gap of 8.3% of GDP. The public debt quota has reached 60% of GDP this year. Moreover, Serbia has enormous structural problems. The country´s unemployment quota ranges between 22% and 25% and the current account deficit stands at 7.5% of GDP.

In general, the Balkan country is highly vulnerable to foreign sentiments. In the last months, the yield on Serbian sovereign bonds was up steadily. The spread on sovereign bonds currently comes at 430 bps. The underlying reason for this development is the announcement of the Federal Reserve to reduce the easing policy gradually.

In order to Serbia´s government will cut salaries for civil servants by more than 20%. In total, Serbia employs about 700,000 civil servants. This corresponds to 10% of the country´s working population. Moreover, the VAT on food will be lifted from 8% to 10%. In addition, Serbia´s government intends to cut infrastructure projects and to reduce subsidies radically. “Without these measures, we will be illiquid in the next two years.” Serbia´s Minister of Finance Lazar Krstic said.

Economists are in doubt whether the austerity package will be sufficient, though. According to analysts, Serbia will have no other alternative than to request an IMF loan. Already in spring, Serbia´s government and the IMF held talks, which were suspended, though. According to the IMF, the Serbian fiscal discipline was insufficient.

Minister of Finance Lazar Krstic said that the talks with IMF, which started last week, are positive. According to Krstic, the austerity package will reduce the budget gap by 2.0% of GDP. In the medium term, the public debt quota will be stabilized, he added.

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