Sebia's Budget Deficit

From Bloomberg this morning:

Serbian Central Banker Sees Spending Linked to Rates

By Editor: Lytle

Aug. 7 (Bloomberg) -- Serbian Central Bank Governor Radovan Jelasic said inflation generated by government spending and increases of controlled prices is the biggest obstacle to further reductions in interest rates this year.

``If we were only trying to meet the core inflation target this year, we could have had a drastic reduction of the benchmark interest rate,'' Jelasic said in an interview yesterday in Belgrade.

The central bank, which began using interest rate policy to control inflation in September, has cut the benchmark repurchase rate 10 times since then to 9.5 percent, as core inflation remained below its target of between 4 percent and 8 percent for this year.

The new Cabinet which took office on May 16 has said it will raise real wages by 13.6 percent this year and announced an increase of state-controlled prices of electricity and utilities.

Jelasic, 38, called the spending plan ``an election-year budget'' and reiterated that the deficit in practice will probably be as wide as 2.5 percent of gross domestic product, compared with the government's plan of 0.5 percent of GDP.

`Expensive Monetary Policy'

The gap may be ``definitely higher than what we want to see,'' he said. The wage increases ``seriously jeopardize Serbia's competitiveness. Expensive monetary policy is a consequence of bad fiscal policy.''

The government's plans will have a ``negative effect'' on the current-account deficit, he said.

``When politicians create a bad budget which brings about forced restrictive monetary policy which creates additional expenses, these politicians then usually want to manage monetary politics as well,'' he said.

The central bank, which targets core inflation of between 3 percent and 6 percent next year, has left the benchmark two-week unchanged for two months. Economic growth will probably accelerate to an annual 7 percent this year from 5.7 percent in 2006, the Finance Ministry has forecast.

The central banker said estimated annual inflation may be as much as 1 percentage point higher than the government estimate of 6.5 percent for this year because of the government's budget policies.

`Urging the Government'

``Whether that breach would amount to 0.5 percent or 1 percent, that remains to be seen,'' Jelasic said. ``I am urging the government to create a set of measures tailored to keep inflation at the projected figure.''

Jelasic has been at odds with the Cabinet of Vojislav Kostunica, claiming the government wants to limit the central bank's independence. Some members of the government's parties in parliament have responded by saying Jelasic's policies threaten the cabinet's credibility and citizens.

Jelasic said ``political attacks on the bank are proof it has kept its independence. Those who criticized us a few months ago for too much lenience toward the government are now criticizing us that we are overly critical to the current government. In practice we are just consistent with our policy.''

The bank is ready to impose ``some unpopular measures related with bank loans for citizens,'' he said. ``Next week we will adopt some restrictive measures related to curbing an increase in banks' credit portfolios.

Jelasic said the measures are needed because rising loans are ``adding fuel to spending, particularly cash loans.''