which stimulates production and discourages consumption – for instance, by raising the vat rate, while at the same time lowering wage taxes. on the side of expenditure, fiscal policy may contribute to the medium - term narrowing of the current account deficit by shifting the budget from transfers and consumption towards investments that target export - oriented and import - substituting sectors. the more effective the use of these two mechanisms, the lesser the need for adjustment through depreciation of the dinar. in fact, i am convinced that efficient structural measures aided by fiscal policy would be more than sufficient to fully eliminate our current account deficit, with no medium - term adjustment of the exchange rate whatsoever. fiscal balance while the composition of fiscal revenues and expenditures represents a potent tool for the reduction of external imbalances in serbia, the balance between fiscal revenues and expenditures represents another key factor for the assessment of credit rating and the country risk premium. recent fiscal problems experienced by some eurozone members, which contributed to the second wave of the crisis, have further heightened the significance of fiscal balance and public debt levels in the assessment of macroeconomic sustainability of many economies. bis central bankers ’ speeches though the share of public debt in gdp in serbia is lower than in many other european countries, it has reached the prudent limit of 45 % as laid down by the fiscal rule ( as defined by the law on the budget system ) and this created the need for valid fiscal consolidation. fiscal consolidation may induce a decline in demand in the short run, but has advantages in terms of improving economic activity and growth over the medium run. high fiscal deficit and growing public debt boost the country risk, which increases the cost of borrowing for the serbian state, corporates, banks and households alike, and discourages the inflow of foreign capital. together, this results in lower economic growth and lower living standard in the medium and long run. fiscal or monetary stimuli fiscal consolidation and implementation of a responsible fiscal policy would create more scope for the counter - cyclical impact of monetary policy, i. e. its capacity to support the economic recovery and contribute to faster recovery at a lower level of real interest rates. in the initial wave of the crisis many countries, including serbia, implemented expansionary fiscal policy to stimulate economic activity. but in this phase of the crisis relying on fiscal expansion would be rather risky due to the limited room for its financing and the fact that foreign investors, credit rating agencies and international financial institutions, such as the imf, are particularly

sensitive to high deficits and growing public debts. one should bear in mind that the scope for using fiscal stimuli is rather limited in countries with high levels of foreign debt since increasing public consumption leads to a further increase in foreign debt and higher cost of borrowing. serbia ’ s foreign debt is already relatively high – almost 80 % of gdp and any further increase in fiscal deficit would only lead to its further rise. it is probably more opportune in such circumstances to consolidate fiscal policy and thereby open up the room for a more efficient implementation of the monetary policy on the way to recovery. allow me to reiterate – fiscal and external imbalances are often connected and, represent the key factors for the assessment of macroeconomic sustainability and the risk premium of any country. therefore, any valid strategy of recovery, i. e. exit from the economic and fiscal crisis, must take into account the effect of such growth on the external and fiscal balance of the country. only growth which leads to the achievement and maintenance of external and fiscal balance in the medium and long run is sustainable growth. only this growth can lead to a sustained decrease in serbia ’ s risk premium and hence cheaper credits for the serbian state, corporates, banks and households. and that is precisely why it is better to have low but sustainable rather than high and unsustainable growth rates. bis central bankers ’ speeches the argument that serbia should persevere on the path of investment and export - led economic growth and that the key role in its achievement should be played by structural reforms and fiscal consolidation was also suggested by standard & poor ’ s in its official statement in march 2011 when serbia ’ s credit rating was improved from bb - to bb : “ the increase of serbia ’ s credit rating reflects the agency ’ s belief that the implementation of economic policy in serbia has improved and that the country has gained a new momentum when it comes to fiscal consolidation, structural reforms and economic rebalance. ” the national bank of serbia, on its part, shall continue to strive towards stabilising inflation at a low level and preserving a healthy financial system, which, i am utterly convinced, represents the best way to help the economy in current circumstances and contribute to the creation of an environment conducive to business and investment. the more effective fiscal consolidation and structural changes are, the more easily will the national bank of serbia achieve its objectives with less monetary policy restrictiveness. bis central bankers ’ speeches