On the basis of Article 31, par.1. item 1) of the Budget System Law (“Official Gazette of the Republic of Serbia”, No. 54/09),
The Government hereby adopts the revised
MEMORANDUM
ON THE BUDGET AND ECONOMIC AND FISCAL POLICY FOR THE YEAR 2009, INCLUDING PROJECTIONS FOR YEARS 2011 AND 2012
I. MACROECONOMIC FRAMEWORK FOR THE PERIOD 2010 - 2012
1. Economic Trends and Perspectives in 2009
Unfavourable tendencies in the economy, which emerged in the second half of 2008, continued in 2009. In the first nine months of 2009, economic activity and foreign exchange were drastically reduced due to significant shrinking of domestic and exports demand, credit activity fall and lower liquidity of companies because of the global economic crisis.
The undertaken economic and monetary policy measures prevented collapse of financial and real sector and mitigated effects of the global financial crisis on the Serbian economy. Recession tendencies were stopped, though it is still not certain when the Serbian economy will start to recover and how long it will take.
| Table 1. Key economic indicators in the period January-October 2009 | |
| I-X 2009 / I-X 2008 | |
| Rates % | |
| Gross domestic product, real growth(1) | -4.1 |
| Industrial production, physical scope | -14.0 |
| Processing industry | -18.1 |
| Retail sales, real growth | -10.7 |
| Tourism, overnight stays | -5.0 |
| Value of construction works, constant prices(1) | -22.4 |
| Transport, volume of services(1) | -14.6 |
| Postal activities and telecommunications(1), volume of services | 26.9 |
| Consumer prices, end of period | 6.0 |
| Consumer prices, period average | 8.5 |
| Exports of goods expressed in EUR | -22.4 |
| Imports of goods expressed in EUR | -30.7 |
| Average net wage, total, real growth | 1.2 |
| Total number of employees with legal entities, period average | -2.1 |
| The number of unemployed persons actively looking for employment | -1.6 |
| January-October / (mil. EUR) | |
| Foreign trade deficit | -4,213.7 |
| Current account deficit, excluding donations(2) | -1.381.4 |
| Net inflow of foreign direct investment(2) | 1,006.5 |
| Receipts from privatisation of social enterprises | 79.6 |
| NBS FX reserves, end of period | 9,726.1 |
| Foreign currency household savings, end of period | 5,373.4 |
Source: Republic Statistics Bureau, NBS, National Employment Service
(1) The data refers to the first half of 2009
(2) The data refers to the period January-September 2009
Gross domestic product was in the first half of 2009 reduced by 4.1% in relation to the same period previous year. Worldwide GDP fall in the first quarter of 2009 was 4.2% and/or 4% in the second quarter. Observed by activities, in the first half of the year the most significant drop was recorded in the sectors of processing industry (-20.5%). construction (-15.0%) and mining and quarrying (-8.1%). Growth was recorded in the transport industry (5.9%), financial intermediation (6.0%) and in the Other Services sector (2%). According to the calculation method of production approach for gross domestic product estimation at 2002 constant prices, fall in gross value added in the first six months of 2009 was 3.0%, whereas category “taxes minus subsidies” was lower by 8.3% as compared to the same period in 2008. The seasonally adjusted data series of GDP quarterly calculation at 2002 constant prices show that the Serbian economy entered recession in the third quarter of 2008 (-0.6%), which was continued in the fourth quarter of 2008 (-0.9%) as well as in the first and second quarter of 2009 (-2.0% and -0.1%. respectively). What is encouraging is the data that in the second quarter of 2009 the fall in GDP was lesser than in the previous three quarters as well as the signs of slight recovery of industrial production recorded in August and September 2009.
Physical volume of industrial production in the first ten months of 2009 in relation to the same period of 2008 was reduced by 14.0%. The largest production decline of 18.1% was recorded in processing industry. By products, the fall in production of all groups of products is recorded, mostly in production of intermediates (-26.2%) and investment goods (-23%). Besides industry, in this period a 10.7% year-on-year decline was registered in real retail trade sales. Retail sales decline was accompanied by real drop in consolidated public revenues of 8.8% in this period. In this period, tourism turnover measured by tourist overnights was lower by 5%. Construction activity measured by the value of executed works in the first half of 2009 was in real terms reduced by 22.4% and physical volume of transport by 14.6%, whereas volume of services in the area of postal activities and telecommunications recorded growth of 26.9%, all in comparison to the same period in 2008. Agriculture, including hunting, forestry and fishing showed GDP growth in the first (1.6%) and second quarter (3.2%) of 2009.
Imports and exports оf goods in the first ten months of 2009 followed the economic activity trends. In this period significant decline in imports and exports of goods was registered, along with large reduction in foreign trade deficit. Reduced current deficit primarily results from decreased imports due to shrinking domestic demand and production. Over the first ten months of 2009 exports of goods, expressed in Euros, fell by 22.4% and imports of goods by 30.7%. At the end of October 2009, foreign trade deficit reached EUR 4.2 billion. Exports decline in the first ten months of 2009 was mainly influenced by 41% reduction in the imports of intermediary products. Exports of durable consumer goods fell by 9.6% and of capital goods by 17.2%, while exports of energy rose by 2.8%.
In the current account balance in the period January – September 2009, the achieved results were better than in the same period in 2008. Current account deficit (excluding donations) was in this period reduced by EUR 3.3 billion in comparison to the same period in 2008, which resulted from reduction in deficit of goods and services by EUR 2.4 billion and inflow of current transfers by EUR 723.7 million, primarily remittances by EUR 739.7 million. In the capital account, outflow of EUR 1.3 million was recorded (in the same period in 2008, inflow was EUR 13.1 million) and the balance in the financial account showed deterioration by EUR 3.3 billion. Despite all this, in the first ten months surplus of the total balance of payments of EUR 1.4 billion was registered. Income position showed deficit because paid interest exceeded collected interest by about EUR 350 million (in 2008 interest paid exceeded interest received by more than EUR 571 million).
Net inflow of foreign direct investment in the period January – September 2009 was EUR 1 billion, which is by EUR 607 million less than in the same period of the previous year. Portfolio investment showed net outflow in the amount of EUR 55.8 million as compared to EUR 59.2 million in the comparable period in 2008. Revenues from privatisation of companies in the first ten months of 2009 reached EUR 79.6 million.
Total inflation in the first ten months of 2009, measured by the Consumer Price index, was 6.0% (October 2009/December 2008) and mainly resulted from the rise in the regulated prices. This period saw a significant rise in consumer prices in the first quarter (3.8%) and slight slowing down of the rise in prices in the second quarter (3.0%). January and May stand out with growth of 2.1% each. In June zero inflation was recorded and in July, August and October we had deflation (-0.9%, -0.1% and -0.2%. respectively).
In the period January – October 2009, the NBS reduced reference interest rate from 17.75% to 11%, starting from the position that inflationary pressures are lower due to considerable fall in aggregate demand in the last quarter of 2008 and in 2009.
Monetary aggregates М2 and М3 recorded increase of 5.8% and 10.8% respectively in the first ten months in relation to the end of 2008, whereas at the same time dinar reserve money and money supply M1 recorded decline of 31.7% and 5.3% respectively.
Bank lending recorded until October growth of 12.1%., whereby rise in lending in euros was below the long-term trend, which results from nominal depreciation in foreign exchange rate at the beginning of 2009. At the same period, bank lending to the economy recorded higher increase (15.7%) than bank lending to households growth (5.7%).
NBS foreign exchange reserves reached EUR 9.7 billion at the end of October 2009, which is by EUR 1.6 billion more than at the end of 2008. At the same time, reserves of commercial banks amounted to EUR 1.1 billion, that is, by EUR 9.3 million more than at the end of the previous year. Total foreign exchange reserves in the first ten months of 2009 rose by approximately EUR 1.6 billion. Increase in foreign exchange reserves was mainly influenced by withdrawal of the first tranche of the IMF loan in the amount of EUR 782.5 million in May 2009. NBS foreign exchange reserves level is sufficient to cover money supply М1 of 399% and imports of goods and services for about 9 months.
Foreign currency savings in the first ten months of 2009 rose by EUR 598 million to reach at the end of October the amount of EUR 5.4 billion. In this period, in foreign currency savings structure, participation of demand deposits grew by 6.2 percentage points, while term savings deposits for period over one year recorded decline of 2 percentage points.
exchange rate of dinar against euro in the first ten months of 2009 varied from 89.5 to 96.3 dinars for 1 euro. In the first two months of 2009, the NBS intervened in the foreign exchange market with EUR 555.4 million, while in other months foreign exchange rate was stabilised so that the NBS did not intervene. Stable RSD exchange rate was considerably caused by increase in foreign exchange reserves and foreign currency savings. Average exchange rate in this period was RSD 93.7. At the end of October 2009, as compared to the end of 2008, RSD exchange rate against EUR nominally depreciated by 5.2% and in real terms appreciated by 0.03%.
Total average net salary in the period January – October was RSD 31,263 and grew in real terms by 1.2% in comparison to the same period in 2008. In this period, average net salary in the public sector was RSD 38,426 and was in real terms lower by 2.6%. Average pension in the period January – October 2009 was RSD 19,785 and was in real terms increased by 6.3% in comparison to the same period in 2008. Ratio between average pension and average net salary in the period January – October 2009 was 63.3%.
Average number of employees in legal entities, according to the data from the Republic Statistics Bureau in the first ten months of 2009 was 1,415 thousand, which is by 2.1% less than in the same period previous year. In addition, a significant decline in the number of private entrepreneurs and employees in such companies was recorded, mainly due to the updated registry of the Republic Health Insurance Institute from March 2009. In this period, employment in the public sector did not significantly change. The number of unemployed persons actively looking for employment in the period January – October 2009 was 751 thousand, which is by 1.6% less than in the same period previous year. From the beginning of the year, this number grew each month until May since when it has begun to decline. According to the labour force survey, unemployment rate rose from 14.4% in 2008 to 16.4% in April 2009.
Bringing a halt to deepening recession tendencies after the severe drop at the end of 2008 and beginning of 2009 resulted from the measures of the Government’s economic policy and the NBS monetary policy measures that were undertaken in this period. Stabilisation of macroeconomic situation, strengthening of foreign exchange reserves and exchange rate stability were considerably helped by the first fifteen-month arrangement with the IMF in the value of USD 520 million and the subsequent extended arrangement with the IMF, approved by the IMF Managing Board on 15 May 2009, by which volume of financial support was increased to EUR 2.9 billion, as well as the agreement reached in Vienna with the largest Serbian banks with majority foreign capital to maintain the total exposure level towards Serbia. Additional financial support to Serbia by the World Bank, EBRD and EU also significantly contributed to fostering the national economy, primarily transport infrastructure.
The NBS measures aimed at increasing liquidity in the banking sector and the Government measures for increase of liquidity of the economy have particularly contributed to the improvement of the situation in the real sector.
To mitigate effects of the global financial crisis, in November 2008 the Government and the National Bank of Serbia adopted appropriate measures for financial stability:
* Increase of the guaranteed savings deposit amount to EUR 50,000;
* Temporary exemption from taxation in the period from 30 January to 31. December 2009 on income from interest on foreign currency savings and other deposits of citizens and repeal of tax on capital gains arising from transfers based on securities and participation interest in assets of legal entities, as well as deletion from taxation by taxes on inheritance and gift and tax on transfer of absolute rights, transfer of securities and participation interest in legal entities;
* Scrapping of the mandatory bank reserves for new foreign loans, with a view to boosting foreign currency liquidity.
In early 2009, the Government adopted the Programme of Measures for Mitigating the Effects of the Global Financial Crisis on the Serbian Real Sector, intended for reduction in public spending, fostering economic activity and employment and modernisation of transport infrastructure.
Package of incentive measures for the economy, which should stimulate banks to approve loans to the economy in the value of RSD 117 billion at double lower interest rate in relation to the market interest rate, is particularly important. Key measures for achieving the above are:
* Liquidity loans – the state will provide RSD 4 billion while the banks will place RSD 80 billion of liquidity loans;
* Favourable consumer loans for purchase of domestic durable consumer goods;
* Additional measures to improve the economic liquidity (debts re-programme, temporary debt conversion into capital, multilateral compensation and other liquidity-enforcing instruments);
* Investment loans – the state provides RSD 5 billion while banks will provide RSD 12 billion; a total of RSD 17 billion will be injected into economy;
* Commercial loans to economy from foreign credit lines – ЕIB. ЕBRD. KfW, the Government of Italy – a total of RSD 45 billion.
In the period from March to October 2009, banks granted approx. EUR 900 million loans at subsidised interest rates, majority of which for liquidity in the amount of over EUR 800 million. The stimulation measures effects for economy were visible in the slowdown of industrial production decline and foreign trade results as well as their mild recovery at the end of the third quarter of 2009.
The Government programme also includes a stimulating package for employment with the following key measures:
* Support for the programme of employment of 10,000 young apprentices until taking the apprentice examination as well as the fund of RSD 3 billion for the support of public works;
* The amount of RSD 3 billion for start-up loans without mortgage;
* RSD 15 billion for loans from the Development Fund for small and medium-sized companies.
The Government Programme also includes measures for promoting investment in the traffic infrastructure:
* Highways at the Corridor 10 which will be mainly funded from loans granted by the international financial organisations and a smaller part will be singled out from the budget of the Republic of Serbia;
* The project documentation for the reconstruction and modernisation will be developed for the railroad at the Corridor 10; also, reconstruction of certain sections will be funded.
To amortise the consequences of the global financial and economic crisis, in late April the Government carried out adjustment to the Republic budget revision for 2009, providing the following:
* Fiscal calibration in 2009, majority of which for expenditures and less for income;
* Non-inflationary fiscal deficit financing in 2009.
In early May, the Government adopted additional stimulating measures for economy which provide support to the economy through:
* Additional RSD 40 billion liquidity loans (a total package of favourable loans is increased to RSD 180 billion);
* Almost double lower interest rates – 3% at the annual level for liquidity loans with a foreign currency clause;
* Introduction of RSD liquidity loans with a 10.5% interest rate per annum;
* Loans for exporters at the double value;
* Favourable consumer loans for the purchase of construction materials.
In mid-September, the Government adopted the Programme of Subsidised Mortgage Loans for new residences in order to allow citizens to buy a new flat easier and cheaper, as well as to stimulate savings for purchase of newly built residences and boost construction industry activities.
Considering the economic tendencies in Q4 2008 and during 2009 under the influence of the global economic crisis and the programme of the Government’s measures to support the economy, the projection of key macroeconomic indicators for 2009 was revised. The estimates claim that the GDP real decrease rate will total -3.0% in 2009 while the inflation rate will total 7.5% (end of period). According to the macroeconomic projection, the expected drop of goods import totals -29.7% and drop of goods export -22.0%, with a decrease of current account deficit to 6.5% GDP.
| Table 2. Projection of key macroeconomic indicators for 2009 | |
| Rates, in % | |
| GDP, real | -3.0 |
| Export of goods, in Euros | -22.0 |
| Import of goods, in Euros | -29.7 |
| Current account deficit, without donations, % GDP | -6.5 |
| Real investments in capital | -22.3 |
| Inflation, end of period | 7.5 |
| Real average net salary | -2.0 |
| Work productivity | -1.2 |
Source: The Ministry of Finance
3% decrease of the Serbian GDP was caused by reduced foreign demand, lower inflow of foreign capital due to the illiquidity of the global economy and caution of the foreign investors in taking investment decisions, as well as reduced consumption in the country, which led to the fall in the activities in certain economic segments, with negative effects on the employment and living standard. However, Serbia achieved lower GDP decrease in comparison to other see countries.
CONTENTS:
I. MACROECONOMIC FRAMEWORK FOR THE PERIOD 2010 - 2012
1. Economic Trends and Perspectives in 2009
2. International economic environment
3. Projection of macroeconomic indicators of Serbia for period 2010-2012
4. Key objectives and economic policy guidelines for the period 2010-2012
4.1. Fiscal Policy Guidelines
4.2. Monetary Policy Guidelines
4.3. Foreign Trade Policy Guidelines
4.4. General Government Wage Policy Guidelines
4.5. Regulated Price Policy Guidelines
II FISCAL FRAMEWORK FOR THE PERIOD 2010-2012
1. Fiscal Trends in 2009
1.1. Fiscal Trends in the Period January-September 2009
1.2. Fiscal Trends’ Assessment by End of 2009
2. Fiscal Framework for the Period 2010-2012
2.1. Fiscal Forecasts in the Period 2010 - 2012
2.2. Expenditure limits for budget beneficiaries in 2010
2.3. Local Self-government
2.4. Tax and Customs’ System
2.5. Improvement of Public Finance management
2.6. Fiscal Risks
III. STRUCTURAL REFORMS IN THE PERIOD 2010-2012
1. Real Sector
2. Financial Sector
3. Labor market
4. Social Activities
5. Health
6. System of Social Welfare
7. Administrative Reforms
8. Reforms of Industrial and Commercial Activities
9. Other reforms
IV. PUBLIC DEBT management STRATEGY
1. Institutional and Legal Framework
2. report on the public debt balance
2.1. Public debt structure
2.1.1. Domestic Debt
2.1.2. Foreign debt
2.1.3. Public debt structure forecast
2.1.4. Currency Structure of Public Debt
2.1.5. Currency structure forecast
2.1.6. Structure of Serbia's Public Debt Interest Rates
2.2. Public Debt analysis
2.3 Forecasts for the period 2010-2012
3. credit worthiness of the Republic of Serbia
4. The role of state in the market of securities
4.1. Modern role of state in regulating the market of securities
4.2. The main functions of the state in the money market
4.3. The main functions of the state in the capital market
5. The issue activity of the state in the financial market
5.1. Assumptions for issuing and trading government bonds in Serbia
5.2. market infrastructure
5.3. Sources of demand
5.4. Creating Offer
5.5. Primary market – issuing instruments
5.6. Defining interest rates and the inflation issue
5.7. Secondary market
5.8. State Bills Issued To Date
V. FINAL PROVISIONS
APPENDIX - Projections of the macroeconomic indicators in the period from 2010 to 2012
- Table 1 : Growth and associated factors
- Table 2: Labour market developments
- Table 3: External sector developments
- Table 4: General government budgetary developments
- Table 5: General government debt developments
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