Radovan Jelašić: Macroeconomic policy in 2009
Speech by Mr Radovan Jelašić, Governor of the National Bank of Serbia, at the Second
Business Roundtable with Government Representatives, organized by the Ekonomist Media
Group, Belgrade, 27 October 2008.
* * *
In terms of political turbulences and uncertainties, this year can only be compared with the
year 2000. The country was faced with the issue of territorial sovereignty, early parliamentary
and local elections, and signing and deferral of ratification of the Stabilization and
Association Agreement with the European Union. As regards the economy, however, no
sooner had inflationary pressures subsided in the wake of a fall in prices of food and
petroleum products, when a new, still greater challenge appeared on the scene. An
unprecedented crisis broke out in the global financial markets and, whereas its negative
consequences were soon felt in Serbia as well, its end effects and duration are still
impossible to forecast.
But let me ask you a question: is anyone in this country aware that, despite all the above
external and internal turbulences, inflation in Serbia is within single-digit bounds, GDP growth
is still robust, the exchange rate had, until recently, been "firmly" stable, real wages have
been rising at double-digit rates for several years now, credits are available, etc.? Or, let me
ask another question which is more important both for myself, and, I am firmly convinced, for
the future of this country - why do people take these results "for granted," as something
which will be sustained of itself, regardless of how we behave? Why do they believe that we
can keep on disregarding external and internal influences without bearing any
consequences? And, especially when we all know that our doings were due to frequent
elections. Why must "bad times" return before people understand that present times were
good, only we failed to make the best of them?!
Macroeconomic stability in Serbia will continue to hinge on the following key factors:
1. Movements in global money and capital markets leave no room for doubt: the
situation is bad, and, for the time being, there is no light at the end of the tunnel.
Capital markets worldwide are swayed by unprecedented turbulences and money
remains expensive despite а) government interventions worth thousands of billions
of euros and b) policy rate cuts and cash injections by central banks.
At the same time, the banking system faces a number of serious challenges, such
as: а) capital adequacy, which governments are now acting to improve and hence
acquire a significant ownership in the banking system, b) the dilemma of whether to
continue lending to clients now that banks are no longer able to borrow in the
financial market, and c) the question of market valuation of assets when there is
simply no market for specific services and products. In light of the above, it is much
less likely that banks will continue to generously "pump" money into our region or
approve cross-border loans.
In current circumstances, it would certainly be very useful to have a political buffer
against economic challenges - if not in the form of the euro as Slovenia and
Slovakia, then at least in the form of EU membership as Hungary or the Baltic
countries. As things now stand, we will obviously have to take on this external
challenge by ourselves. And to be successful, everybody in Serbia, or at least the
decision-makers, need to understand that the situation is very serious indeed. My
warnings can no longer be discarded with: "The Governor is scaring people because
he does not want wages or pensions to go up!" What I suggest is that all Doubting
Thomases watch the news at least once or read at least one daily newspaper from
any country they choose - Brazil or China, Venezuela or Russia. The time of
slogans and empty phrases is long past. If Serbia does not make major changes to
its economic policy in the near future, it may easily end up high on the black list next
to some other countries of the region. And I am sure that no one wants this to
happen!
2. Monetary policy: This instrument has traditionally been restrictive, at times even too
restrictive, which frankly only left more room for the fiscal policy! At the moment,
however, there is no alternative for the NBS but to implement restrictive policy
stance as inflation, the key challenge for the central bank and the main threat to
both macroeconomic stability and standard of living, is not yet overcome.
Professionally, however, we can be satisfied that all international financial
institutions and rating agencies are commending the work of the National Bank of
Serbia.
Turbulences in the international financial market will not only affect the value of the
dinar, but will also very much strengthen its role in the banking sector, even without
any further restrictive measures by the NBS. Still, I hope that the government
understands that these cheaper dinar loans will be in larger supply only if inflation
and inflation expectations are reined in, which will, in turn, lead to cuts in the NBS
key policy rate.
Of late, many have asked why the NBS does not cut its key policy rate like other
central banks have. And the answer is simple - whereas normally any decline in
economic growth automatically dampens inflationary pressures, Serbia is unique in
this respect again and, capable of doing two bad things at the same time: having
both lower economic growth and higher inflation. This has been proved several
times over the past few decades. And this is why it is necessary that the NBS
continues pursuing a highly restrictive monetary policy.
3. Fiscal policy: Everyone is perfectly clear as to what needs to be done. All projections
currently under preparation as part of the 2009 budget must be as pessimistic as
possible, on both the revenue and expenditure sides. Let me make a note of some
of the key categories:
•
Privatization revenue from the prior period has been spent and the
likelihood of substantial future inflow of revenue on this account is
diminishing;
•
Terms of borrowing in both domestic and international financial markets
have already worsened - the price is not even asked;
•
VAT revenue will certainly dwindle, as uncertainties rise and the purchasing
power diminishes,
•
The volume of contributions will also shrink!
On the expenditure side, calls for looser fiscal policy will grow even stronger,
especially as the private sector is retreating. The time of easy and cheap bank
lending is now over. What is more, limited access to new lending may lead to limited
investment in the private sector which Serbia stands in great need of.
The two enduring macroeconomic challenges for Serbia - inflation and current
account deficit - will become even more difficult to take on. And we are repeatedly
sent the same message: by Standard&Poor's two months ago, by EU
representatives at end-September, and by the World Bank and the IMF early this
month. These messages are loud and clear for all to understand. And, since we
ourselves are fully aware of what needs to be done, the question remains: What
keeps us from doing it?
4. Structural changes: Restructuring of large public enterprises, privatization of the
remaining state-owned enterprises and institution of bankruptcy proceedings against
enterprises that cannot be privatized lies at the core of the transition process in
Serbia. In this regard, however, we must be realistic: what we can do today is based
on a couple of years' work and the first positive results of our present activities will
be visible in two to three years. Structural changes are very significant and must be
implemented without delay, but their results are slow in coming!
Structural reforms have been postponed time and again in an effort to preserve
social peace and now, the conditions for implementing them will only have
deteriorated further. Many are aware that financial and organizational restructuring
on a larger scale, including declaring redundancies, was postponed in anticipation of
better days, when it will be easier for people to find new jobs or take out loans to
start their own businesses. This is, however, highly unlikely in the months ahead.
But this is not the first time that Serbia is facing major challenges. In fact, we often perform
best under worst circumstances and I have every reason to believe that we will succeed this
time again. It is important that all decision makers understand one thing: in the course of the
next year or two, it will be impossible to be a popular and a responsible politician at the same
time unless you are in opposition. And no coalition agreements, reference to "specific"
circumstances or excuses that we are simply late in the transition process will help us fight
the two major macroeconomic challenges, current account deficit and inflation. Inflation and
external deficit respond to the above listed four categories only. The first - movements in
global money and capital markets - is beyond our control and will probably only produce
further negative effects. Monetary reins are already tight enough and structural changes are
not the quick medicine we now need! What else are we left with other than fiscal policy!