Serbia pledges public sector, pension reform; IMF warns on deficit

BELGRADE Mon Jul 8, 2013 3:21pm IST

Serbia's Economy Minister Mladjan Dinkic talks during a business forum at the Kopaonik winter resort March 9, 2010. REUTERS/Djordje Kojadinovic

Serbia's Economy Minister Mladjan Dinkic talks during a business forum at the Kopaonik winter resort March 9, 2010.

Credit: Reuters/Djordje Kojadinovic

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BELGRADE (Reuters) - Serbia will begin reforming its costly public sector and pension system before the end of the year, the government said on Monday, as the IMF pressed the country again to do more to bring its high budget deficit under control.

Public sector wages and pensions in the former Yugoslav republic account for around half of state outgoings, and the high fiscal gap means the ruling coalition faces the politically unpalatable prospect of having to cut back on jobs, wages and pensions.

Parliament on Friday adopted a revised budget for the year based on a deficit forecast of 4.7 percent, though Serbia's top fiscal advisory body warned the revision was "optimistic" and the shortfall would probably hit 5.3 percent.

The revision stops short of freezing or cutting public sector wages or pensions, something Finance Minister Mladjan Dinkic said on Monday would hurt domestic demand and growth. He said structural reform was the only long-term solution.

The International Monetary Fund said the new budget was a "step in the right direction" but more needed to be done.

"Additional (fiscal) measures are needed, not only in 2014 but in the medium term," the IMF's resident representative in Serbia, Bogdan Lissovolik, told an economic conference in Belgrade, also attended by Dinkic.

Market concern over Serbia's budget deficit and public debt, which is forecast to hit 65 percent of GDP, has shaken investor confidence and piled pressure on the dinar currency.

The IMF warned in May that the deficit could breach 8 percent of gross domestic product (GDP) and called last week for a "comprehensive" overhaul of the pension system and measures to contain the public sector wage bill.

The government's reluctance to cut wages has helped doom talks with the IMF on a new precautionary loan deal, which Belgrade now says looks unlikely this year. The government instead says it wants budget support from the World Bank.

Deputy Prime Minister Aleksandar Vucic told Monday's conference that the government was preparing a reform of the pension system and would start reforming the public sector and state enterprises before the end of the year.

Public enterprises needed to behave "in line with the market," he said.

The World Bank's representative in Serbia, Loup Brefort, said the Bank stood ready to offer further support. "Whether we will offer financial support in addition to technical backing ... it will be known in the coming weeks," he told the conference.

Finance Minister Dinkic said World Bank support might improve prospects of an IMF loan deal to replace a previous 1 billion euro ($1.28 billion) arrangement frozen by the Fund in early 2012 over broken spending promises.

"We need backing from the World Bank for budget support," Dinkic said. "When we complete that, there might be a better climate for talks with the IMF."

(Reporting by Aleksandar Vasovic; Writing by Matt Robinson; Editing by John Stonestreet and Susan Fenton)

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