IMF warnings to threaten Serbia’s European future

By Styliani Kampani. Originally published on 2012/09/12

Serbia in the EU? The scenario sounds feasible: the foundations of the EU-Serbia relationship were laid back in 1997 with the Regional Approach (when the EU Council of Ministers established political and economic conditionality for the development of bilateral relations), and now the European Council has officially granted Serbia the status of candidate country (March 2012). However, since the national elections in May, the IMF and the World Bank have been extremely critical over the new government’s move to increase parliamentary control over the National Bank of Serbia (NBS).

This tension has culminated since the replacement of the bank governor by a senior lawmaker from the ruling coalition. Simultaneously, the issue drew the attention of EU officials who warned Serbia to stick to the accession preconditions.

Entering the EU club is huge step, especially for a country that has experienced such major ordeals as the dissolution of the Former Yugoslav Republic and the fall of Slobodan Milosevic. Indeed, the prospects for Serbia to fulfill the Copenhagen criteria –in which a candidate country has to support a functioning market economy and dispose the capacity to compete with other countries within the Union- seem weak.

Balancing the Serbian economy

There exists a broad political consensus in Serbia on the fundamental principles of a market economy, as well as several initiatives to implement economic reforms. Serbia has obtained a degree of macroeconomic stability. Moreover, thanks to its economic policies during the last decade, Serbia has managed to sustain a steady growth rate that is close to 5% on average, gradually decline its inflation and improve the living standards of its population.

Besides, a substantial progress has been made recently towards the strengthening of its financial framework and the improvement of its public finances, marking a shift to a more sustainable and balanced growth driven by exports and investments. In addition, Serbia has freed and developed its market through privatization and liberalization of trades and prices, although still at a slow and irregular pace.

However, if Serbia wants to restructure its economy and improve its business environment, it has to go the extra mile. Strengthening the rule of law, enhancing competition and the role of the private sector, as well as tackling the rigidity of its labor market are the most important examples of what it can do to make these extra efforts. Moreover, Serbia needs to pursue structural reforms in order to enhance the productive capacity of its economy and create a climate conducive to increased foreign investments, which would eventually enable it to cope, in the medium term, with competition and market forces within the Union.

Sudden implications

Serbia’s new government has been facing international criticism since the appointment of a ruling party official as head of the country’s central bank and the adoption of a legislation that subjects it to a greater political control.

The administration has come under scrutiny since the elections in May, largely due to the nationalist past of President Tomislav Nikolic and Prime Minister Ivica Dacic. President Nikolic was formerly a senior figure and presidential candidate for the ultranationalist Serbian Radical party. The Prime Minister was a spokesperson for the Serbian strongman Slobodan Milosevic. While the two leaders have repeatedly asserted their pro-European stance, the appointment of a senior party official as head of NBS and the resulting changes to the central bank’s regulation are perceived as major concerns by international institutions and investors alike.

The Serbian parliament proposed 46 amendments to the NBS Law modification bill, including the annulment of the provisions on the possibility to use foreign exchange reserves for the purchase of securities on the secondary market. Even the Opposition, the Democratic Party, believes that this would prevent NBS from taking dangerous risks on the secondary securities market, therefore eliminating the uncertainty and concern among citizens and experts regarding the stability of NBS operations.

Red alarm

Such news has caused a stir in the other side of the Atlantic. Indeed, the IMF and the World Bank warned that these decisions can result to macroeconomic instability and borrowing problems. IMF also made certain remarks regarding the amendments, claiming that they constitute a grave risk for the NBS foreign exchange reserves. The Europeans were not that happy to hear the Serbian government’s new plans either. A European Commission spokesperson said that the changes could be a “step back” in the Serbia’s EU membership process. The Commissioner for Enlargement and European Neighbourhood Policy, Mr Štefan Füle, also opposes the modification of the NBS Law, since he considers that such movement would constitute a violation of the EU acquis.

The Serbian government’s move to exert greater control on the central bank is an echo of the recent changes in Hungary and Romania that have also seen their governments accused of undermining independent institutions – though Serbia has not gone as far as its neighbors. The market and rating agencies naturally replied with “poisonous arrows” – increasing lending rates – as to punish the disobedient students by giving them bad grades. Sounds familiar.

The conclusion that can be drawn from this is that the game of free market does not leave space for cheating.