Report on Work of the Ministry of Finance

in the First 100 Days of the Government

Belgrade, 24 October 2008

• Proposed Law on Amendments and Changes to 2008 Budget Law adopted;

• Memorandum on the Budget and Economic and Fiscal Policy for 2009, with projections for 2010 and 2011, adopted;

• Preparation of 2009 budget, proposed new laws and bylaws is underway, as well as advancement of the existing ones.

OVERALL RESULTSOVERALL RESULTS - - Fiscal policy until 2011 defined -Fiscal policy until 2011 defined -

– Average growth rate over the past three years was 6.5%, 7% growth is expected this year

– The growth is relatively widely diversified (large number of branches has average and above-average growth)

– Exports grow at around 25% rate and are also widely diversified– Inflation has slowed down (September retail prices index was

9.5% yoy);– ...but we should not forget about the BOP deficit– Positive tendencies in Serbian economy are expected to

continue, despite the global financial crisis (recession in Serbia would not mean zero or negative growth, but a 4% growth)

OVERALL RESULTSOVERALL RESULTS

- - Fiscal policy is based on assessment of Fiscal policy is based on assessment of macroeconomic tendencies macroeconomic tendencies --

OVERALL RESULTSOVERALL RESULTS - - Estimated growth of basic macroeconomic Estimated growth of basic macroeconomic

indicatorsindicators, % - , % -

2008

Real GDP growth 7.3

Increase in exports of goods, denominated in euros 20.5

Increase in imports of goods, denominated in euros 22.4

Current account deficit, donations excluded, % of GDP -18.4

Real growth of investment into fixed assets 12.3

Inflation, end of period 9.5

Unemployment rate, (ILO definition) 18.6

Real growth of average net wage 6.0

Labor productivity growth 6.9

OVERALL RESULTSOVERALL RESULTS - - Reasons for budget revisionReasons for budget revision--

• Reporting fiscal result in line with the GFS Reporting fiscal result in line with the GFS international standard international standard ((which had not been applied which had not been applied beforebefore) ) that allows making comparisons with other that allows making comparisons with other countriescountries

– Citizens of Serbia should be aware of the fiscal burden and real costs

– Please note:• The former methodology, on average:

– overestimated regular revenue;– underestimated regular expense;– made overall fiscal result slightly better, but the discrepancies

are not dramatic!

• Revenue higher than plannedRevenue higher than planned ( (unexpected luckunexpected luck))

• A changed structure of expenditure, because the A changed structure of expenditure, because the new government has new prioritiesnew government has new priorities– accelerated building of infrastructure,– financial incentives for strategic investment,– improving the situation of pensioners,– financial support to talented persons etc.

• The Revision aligns revenue and expense with developmental and social priorities of the new Government

• A balance has been achieved between social and developmental objectives, while macroeconomic stability was not additionally jeopardized

• Proposed Revision is a reasonable compromise in given political circumstances (reasonable, because fiscal rules were observed!)

20082008 Budget Revision Budget Revision

2008 Budget Law Law on Changes and

Ammendments to 2008 Budget Law

Increase / Decrease

A Total revenue (I+II+III) 639,600.3 650,174.3 10,574.1

I Current revenue (1.+2.) 639,600.3 650,174.3 10,574.1

1.Tax revenue (1.1+…+1.6) 596,179.1 606,464.9 10,285.8

1.1. Customs duties 61,584.7 70,447.7 8,863.0

1.2. Income tax 72,000.0 76,046.6 4,046.6

1.3. Profit tax 34,024.4 36,087.1 2,062.7

1.4. VAT 311,493.5 315,642.2 4,148.8

1.5. Excises 111,274.7 102,314.9 -8,959.7

1.6. Other taxes 5,801.9 5,926.4 124.5

2. Nontax revenue 43,421.1 43,709.4 288.3

B Total expense and net borrowing ( I+II+III) 680,548.8 695,959.1 15,410.3

I Current expense (1.1-1.8) 588,551.3 614,854.5 26,303.2

1.1 Wages and salaries 149,374.5 150,362.4 987.9

1.2 Social contributions (412) 27,448.9 27,251.6 -197.3

1.3 Procurement of goods and services 45,714.8 45,900.3 185.4

1.4. Interest 16,957.0 16,437.2 -519.8

1.5 Subsidies 39,571.9 48,469.4 8,897.5

1.6 Social assistance benefits 66,703.2 68,119.3 1,416.1 1.7 Transfers to other governmental levels and MSSO 232,762.8 247,089.1 14,326.3

1.8 Other current expense 10,018.3 11,225.2 1,206.9

II Capital expense 65,877.8 59,058.1 -6,819.7

III Net borrowing 26,119.6 22,046.4 -4,073.2

IV Surplus / Deficit (А - B) -40,948.5 -45,784.7 -4,836.3

Financing of the Republic of Serbia deficit and debt repayment in 2008

dinars, millions

 

2008 Budget Law

Law on Changes and Amendments to 2008 Budget Law

1. Funds needed -89,306.2 -92,118.8

1.1. Budget deficit -40,948.5 -45,784.7

1.2. Repayment of principal -48,357.8 -46,334.1

2. Financing 89,306.2 92,118.8

2.1. Deposit decrease 30,000.0 30,000.0

2.2. Current receipts from privatizations and bankruptcies 35,000.0 35,000.0

2.3. Net borrowing 24,306.2 27,118.8

• Total revenue grew by 0.4% of GDP, from RSD639.6 billion to RSD650.2 billion (mostly due to better than expected revenue from personal income tax, profit tax and customs duties)

• Total expense rose by 0.6% of GDP, from RSD680.5 billion to RSD695.9 billion (mostly due to increased subsidies, higher expenditure on pensions, accelerated payment of unemployment benefits)

• Total budget deficit increased by 0.2% of GDP, from RSD40.9 to RSD45.8 billion

• Fiscal policy did not become significantly more expansive with this Revision!

• It was man-made, therefore, it is not optimal: it is procyclical, but sustainable (there is room for improvements)

• Fiscal burden, public consumption and size of the deficit are at the regional average (it is the price of the balance achieved between developmental and social objectives of the government)

• Finally, basic fiscal rules were observed:

OVERALL RESULTSOVERALL RESULTS - - FISCAL POLICY EVALUATION FISCAL POLICY EVALUATION --

• The deficit is not excessive– Deficit exceeding 3% of GDP is considered

excessive, according to the Maastricht Treaty– Fiscal deficit can be higher if …public

investment are higher today, but are expected to decline in future

Golden rule : The state borrows only to invest, but not to finance current consumption; and

Sustainable investment rule: public debt as percentage of GDP should be at a stable and prudent level; though the referent value is below 60%, the desirable number would be 40%

• The Ministry of Finance, in coordination with the National Bank of Serbia, monitors on a daily basis potential overflow of the global financial crisis on Serbian economy

• At the proposal of the Ministry of Finance, the Government has changed several laws, whose application will moderate any negative consequences, primarily:

– Deposit Insurance Law– Law on Bankruptcy and Liquidation of Banks and Insurance

Companies– Law on Deposit Insurance Agency

OVERALL RESULTSOVERALL RESULTS

-- Fiscal and monetary policyFiscal and monetary policy coordination coordination --

• Basic changes are in line with EU directives:– Definition of insured deposit expanded (beside private deposits,

SME deposits are also included)– Insured deposit amount increased from EUR3,000 to EUR5,000 per

depositor, per bank;– The activity of Deposit Insurance Agency expanded to the entire

banking sector (up until now, it focused on state-owned banks only)

– Beside the previous method of covering potential losses (swapping for treasury bonds), providing swift liquidity, i.e. recapitalization, is also envisaged

OVERALL RESULTSOVERALL RESULTS

- Fiscal and monetary policy coordination - Fiscal and monetary policy coordination --

• The Ministry of Finance will encourage development of the domestic financial market with a substantial bond issue to

– reduce borrowing abroad– strengthen monetary policy efficiency– stimulate saving

OVERALL RESULTSOVERALL RESULTS

-- Financial market development Financial market development --

• Certain measures that were announced earlier are underway, their objective will be to promote saving and help financial market development:

– Suspension of tax on revenue from saving interest (or a considerable reduction, in any case)

– Abolition of capital gain tax and transfer tax on securities trading, in order to support development of the domestic financial market

OVERALL RESULTSOVERALL RESULTS -- Financial market development Financial market development --

OVERALL RESULTSOVERALL RESULTS - - Unilateral implementation of Interim Unilateral implementation of Interim

Agreement with the EU member states Agreement with the EU member states --

• Implementation of Interim Agreement on trade and trade-related matters is to start as of 01 January 2009;

• The objective is to reduce the time that needs to pass between the start of implementation of the Interim Agreement and granting of the candidate status;

• Full trade liberalization will be completed within six years, by 01 January 2014;

• The pace of liberalization may be accelerated, depending on economic situation.

OVERALL RESULTSOVERALL RESULTS - - Unilateral implementation of Interim Unilateral implementation of Interim

Agreement with the EU member states Agreement with the EU member states --

• For the economy, implementation of the agreement means the possibility to import industrial and agricultural goods originating in the EU duty-free or by paying lower customs duties than those stipulated by the Customs Tariff Law;

• For agricultural products (because of their importance) a slower tempo of trade liberalization is envisaged– around 35% of agricultural products can be imported duty-free

immediately after start of implementation of the agreement, while the pace of trade liberalization for other products will develop in line with the dynamics stipulated by the agreement.

OVERALL RESULTSOVERALL RESULTS - - Unilateral implementation of Interim Unilateral implementation of Interim

Agreement with the EU member states Agreement with the EU member states --

• Degree of liberalization will be higher for industrial products, and customs duties will be lowered in line with the dynamics envisaged in the agreement :

• For proper application of the agreement, the Ministry of Finance has prepared an Instruction that contains tariff classification and respective customs duties, which will be published on the MoF website.

2009 2010 2011 2012 2013 2014

non-sensitive, sensitive products 70% 40% 0% 0% 0% 0%

highly sensitive products 80% 60% 40% 20% 0% 0%

extremely sensitive products 85% 70% 55% 40% 20% 0%

• Over the past three months, a number of agreements with international financing organizations concerning borrowing, guarantees and donations were ratified: – International Bank for Reconstruction and

Development– International Development Association– European Investment Bank

• Worth around EUR500 million

OVERALL RESULTSOVERALL RESULTS - - other legislative projectsother legislative projects - -

• Public Procurement LawPublic Procurement Law– There is no perfect law; a law can always be

subject to criticism (that is why they are often changed, particularly during transition)

– It is aligned with EU directives and will lead to saving in the state coffers

• Securities LawSecurities Law– Trading in shares of companies undergoing

privatization is facilitated– Changes provide for attaining a better price– Financial reporting is simplified and costs of

notification of participants are cut– Broker-dealers will execute their clients’ orders more

swiftly– Stockholding companies with majority share in

socially-owned/public property undergoing privatization may offer their shares on the organized market

• Establishment of Public Debt Administration and Free Economic Zones Administration

• Establishment of organizational units for implementation of IPA funds

• .....

OVERALL RESULTSOVERALL RESULTS - - Organizational reformOrganizational reform - -

• An IMF program is planned• The program will involve minimum expenses for the state,

while bringing substantial benefits– Support in economic policy management in uncertain conditions

will• make fiscal policy sustainable in the long run• set limits to increase responsibility regarding spending, wage

agreements and productivity

OVERALL RESULTSOVERALL RESULTS

- - Future stepsFuture steps - -

– The way to secure enhanced credibility of the state (with a firm program, Serbia would demonstrate that the risk is lower than in other countries and would be able to receive cheaper loans, primarily from international financing institutions, for infrastructure, but also for finalization of restructuring and privatization)

– Accelerate EU accession process (Serbia is currently in a vacuum: it neither has a program, nor did it qualify for IPA programs)

– The program by itself is not sufficient to calm the market down, but in conjunction with other measures, it would make a good cocktail

OVERALL RESULTSOVERALL RESULTS - - Future stepsFuture steps - -

• Tax system reform related with taxation is planned to continue: personal income tax, capital gain tax and securities tax, excise on cigarettes and oil derivatives, profit tax, administrative fees;

• The customs system is changing toward unilateral implementation of the SAA and cutting the customs duty on cars to 10%.

Thank you for your attention

20 Kneza Milosa

011 3642 626

kabinet@mfin.gov.rs