Interview: Dušan Vujović, Serbian Minister Of Finance: Tough Measures for Decisive People

t was very difficult to break the three-year impasse, come up with a good programme design and agree a balanced arrangement with the IMF. And it is going to be equally difficult to implement it. The Serbian Government reached a comprehensive agreement with the IMF that envisages bold measures, but won’t tolerate any slippages in the programme to return Serbia to sustainable fiscal deficit levels and a falling debt-to-GDP path, says Serbian Finance Minister Dušan Vujović.

The first implementation step was already made in the supplementary budget for 2014, but the most difficult part in the initial phase will be the passage of the 2015 budget with the inclusion of all the necessary measures and the batch of laws required to implement the policy and institutional changes.

Minister Vujović is confident that this Government will not repeat the history of IMF agreements, in which Serbia often fell off track after a very short implementation period. We won’t wait too long to see whether that is the case again, since the new three-year agreement with the IMF envisages twelve quarterly reviews, which signals the complexity of the programme and the cautiousness of the IMF.

According to many analysts, these were the quietest and most complicated negotiations with the IMF. Now that agreement has been reached with the IMF regarding the substance of the arrangement, what sequence of events should we expect?

– Indeed, these negotiations were long, complex and demanding. The last arrangement with the Fund, signed in September 2011, went off course at the first review. Since then a series of new attempts to resume a credible programme with the IMF did not succeed. In the meantime, our fiscal deficit grew to unsustainable levels and, hence, deepened the size and scope of the necessary adjustment. A deteriorating global environment made things even more complicated.

In short, we were faced with a difficult task of demonstrating government resolve to continue with reforms, restore confidence in our relations with the IMF and design a comprehensive three-year programme. We reached agreement on a range of important macro-fiscal policies and structural reforms related to failed commercial enterprises, state-owned monopolies in energy and infrastructure and, last but not least, public administration reform.

The programme distributes the burden of adjustment more evenly across four pillars (expenditure cuts, better revenue performance, resolution of failed enterprises and public sector reform) and time (2015-2017).

The first implementation step was made in the supplementary budget for 2014. We now continue with the budget for 2015, which introduces a full range of measures focused on fiscal deficit and public enterprises. We won IMF support for the government programme that seeks adjustment through macro measures and improved public sector performance. Instead of being a problem for decades, public enterprises have now become a part of the solution.

PM Vučić said that it is most important that Serbia convinces the IMF that it “can be a reliable partner”. What will be our basic measure of reliability?

– We already demonstrated our dedication and resolve to complete these difficult reforms through a credible programme. The measure of success will be our ability to continuously achieve the agreed fiscal deficit and public expenditure targets, carry through the resolution of problematic enterprises and banks, as well as improve public sector governance and performance.

It is important that one demonstrates the broad ownership of fiscal and structural reforms intended to put Serbia on a sustainable growth path, create jobs and benefit all citizens. The role of the IMF in the design stage was to share their expertise and best world practices applicable to Serbia. In the implementation stage, their role will switch to an independent reviewer that will ensure safe transition to manageable fiscal deficit and public debt levels.

How acceptable to the IMF, in terms of the need for savings in the budget, is the Serbian approach to solving the problem of large companies, such as, for example, the Smederevo steel plant, where the government assumes the burden of debts and promises partners their own specific share?

– Both the government and the IMF are eager to resolve the problems of large state-owned enterprises. Renewed production at Smederevo and the petrochemical companies can provide a significant revival of economic activity and boost economic growth anywhere between one and two per cent of GDP. This upside potential is not reflected in the conservative growth projections that underpin the programme agreed with the IMF.

How much were negotiations dominated by the issue of resolving the status of public enterprises and achieving benchmark programmes related to their performance?

– Although improved corporate structure and governance are at the core of better public sector performance, the operational details of their restructuring programmes were not discussed with the IMF at this stage. Instead, the World Bank and EBRD will take the lead in this area and launch coordinated activities in the coming weeks aimed at developing comprehensive restructuring programmes for EPS, Serbian Railways, Srbijagas and other most important public enterprises. It is likely that these programmes will take two to three years to develop and implement, but in the end they will free Serbia from the unsustainable fiscal consequences caused by public enterprises in the past.

Both you and the Prime Minister have highlighted repeatedly that there will be no additional cuts in salaries and pensions, which contradicts the estimates of the Fiscal Council. Where will additional savings be sourced and what figures does this relate to?

– We carefully designed and measured all elements of the programme. Although we minimised the necessary cuts in salaries and (part of) pensions, we are confident that there will be no slippages in the programme to return Serbia to sustainable fiscal deficit levels (2-3%) and a falling debt-to- GDP path. Hence, we believe there will be no need for further reductions in salaries and pensions.

Significant savings will be made in other areas by reducing ineffective subsidies, improving efficiency in public enterprises, cutting other operating costs and charging fees for the use of public resources (such as transit fee for using gas pipelines).

What do you think of the proposal of Srboljub Antić, our former representative at the IMF, that savings be made through the abolishing of the positions of government advisors who usually receive salaries from public companies?

– This suggestion targets advisors who do not provide any useful role to the government. In those cases they should be released immediately, but this is often not the case. Advisors frequently provide a valuable service that cannot be readily found among core government staff, but they cannot be offered permanent positions, either due to the hiring freeze or their preference to retain their jobs at universities or in the private sector.

How much does a weakened dinar suit the government, in terms of reducing expenditure through the devaluation of wages and pensions by their official rate reductions, and how threatening is it with regard to raising the level of indebtedness, which is at a worrying 76% and is increasing the burden of loan repayment for businesses and citizens?

– Based on our information, public debt is somewhat lower and will reach 70 per cent of GDP at the end of 2014. Given that the latest inflation projections released by the NBS suggest that consumer prices will continue to be very stable (close to the lower end of the corridor), as well as the nominal exchange rate, I do not anticipate any large or sudden movements in the real exchange rate. Hence, the effects on real incomes and real debt service burden (of government, companies and households alike) are likely to be small.

What is the IMF seeking from our government in terms of resolving issues of the remaining state-owned companies, such as Srbjgas, EPS and Serbian Railways, and what has the government offered in this respect?

– At this stage the most important measure is to limit their impact on public deficit and debt. In the past the main channel through which poor performance of these companies affected the deficit and debt was through guarantees on short term (liquidity) loans, which invariably got called and translated into both deficit and public debt. This channel will be closed in the future. Public guarantees will be available only for long-term development and/or restructuring loans from IFIs that will move public enterprises onto a sustainable business model.

How much did the privatisation of Telekom and the finding of a strategic partner for EPS come up during negotiations with the IMF? Were these two issues mentioned in term of the possible coverage of budget shortfall and the way in which generated revenues can be utilised?

– Restructuring and/or privatisation plans for specific public enterprises were not discussed within the programme. However, the programme reflected a position that proceeds generated from possible privatisations should be used to lower the outstanding debt levels, lower the cost of debt (through refinancing) or be used to complete high yield public sector projects. The proportions will be subject to discussion and prior consent.

Speaking publicly, you have shared the optimism of Prime Minister Vučić regarding the improving of conditions in 2015 and 2016. Today, considering what seems to be the Serbian economy’s new entry into recession and a very difficult geopolitical situation, do you still believe economic growth is imminent?

– Yes, indeed. As I already mentioned, we agreed to base the program measures on very conservative GDP, capital inflow and export growth projections. This does not capture a significant upside growth potential. This year was marked by the floods and declining external demand for Serbian exports. If the EU markets recover in 2015 and we have a rebound of activities adversely affected by the floods, esp. coal and electricity, along with the resolution of issues in the steel and chemical industries, there is clearly a potential for earlier growth revival.

You do not appear often in public, which raises suspicions among analysts that you are a lone rider in a government still dominated by inter-party differences. In your opinion, how much essential unity is there in the government with regard to the implementation of austerity measures?

– I entered this government as an expert and I tend to limit my presence in the media to issues related to my professional responsibilities. I think that we have a broad consensus on reforms that form the core of the programme supported by the IMF and I hope that everyone in the core economic team and the whole government will take their respective share of responsibility in implementing the government’s programme.

I am particularly grateful to ministers exposed to the greatest public and social pressures caused by the austerity measures. They are putting in a valiant effort to appease the protesters and advocate the necessity of reforms for our better future.

Considering current budget income from taxes and excise duties, how optimistic are you regarding the reduction of the grey economy and increased budget revenues from this source?

– The tax administration is taking robust measures to curb the grey economy and increase VAT and excise tax collections. In the past three months collections consistently exceeded the previous year’s numbers. To sustain this effort in the medium term, and reach compliance levels with the EU and OECD countries, the tax administration will have to be better organised and reformed. The government will soon adopt a strategy for deeper tax administration reform, pivoted on smart risk assessment and design of inspection plans based on the best world practice. At the operational level, the tax administration will follow new rules that will increase the transparency of the process significantly, improve revenue collection and reduce the scope for corruption.

Many people suggest that it’s easy to sign a deal, but that our history is full of unfinished arrangements because the governments did not have the strength to stick to the conditions set, and that this could also be the case with the present deal. How regularly do you think the arrangement could be checked (quarterly, half-yearly) and do deadlines set in that way mean to you?

– To start with, in this case it was very difficult to break the three-year impasse, come up with a good programme design and agree a balanced arrangement. And it is going to be equally difficult to implement it.The arrangement will have twelve quarterly reviews. In the initial period the most difficult part will be the passage of the 2015 budget with all the necessary measures included and the batch of laws required to implement the policy and institutional changes. Political support and broad social ownership of the measures are crucial in the first reviews.

In the latter part of 2015, the emphasis will move to improved revenue and public enterprise performance, as well as other aspects of structural reforms, including public administration reform. Orderly resolution of problematic enterprises and banks will also be crucial.

Finally, the successful reform and/or privatisation of key public enterprises will be the central priority in 2016-17.

How much do you view the meeting of conditions now set for us, in addition to the IMF, by the European Commission, as a condition of our accession to the EU? (Here we are referring to the recent warning of the EBRD’s Milica Delević that irresponsible behaviour of states in the region regarding austerity measures could jeopardise their European future).

– The European Commission and the IMF share their views on the necessity of fiscal savings. There are no explicitly defined savings as joint EU conditions, but achieving economic self-sustainability is a condition. In that respect, fiscal adjustment is among the most important elements and, hence, is unavoidable.

CorD Magazine

You can read the interview here:

http://www.cordmagazine.com/component/content/article/1115/1115.html