Serbia was already in recession when the government led by Socialist Ivica Dačić came to power on 27 July (see background). GDP fell 1.3% and 0.6% in the first and second quarters of the year, with a 1% drop forecast overall for 2012.
Public debt currently accounts for 55% of GDP, while according to the law it must not surpass 45%, and the budget deficit exceeds 7%. Unemployment is rising and now stands at 25.5%, while the level of non-performing loans is over 20%.
The bad news was augmented on 7 August when Standard & Poor’s cut Serbia's debt rating one notch, to BB-minus, with a negative outlook, pushing it deeper into junk territory.
Government targets National Bank
The rating agency's report also raised concerns about the new government’s push to amend the law on the National Bank. Critics say the changes could lead to the politicisation of monetary policy and jeopardise the foreign currency exchange rate and foreign currency reserves.
Under the amendments, the parliament has a bigger role in appointing central bank vice governors and in approving the bank’s statutes.
The bank’s governor, Dejan Šoškić, and several other top officials resigned over the changes.
Šoškić’s successor, Jorgovanka Tabaković, is a member of the ruling Serbian Progressive Party. Tabaković has announced she will freeze her posts in the party in order to meet the condition that the governor cannot at the same time be a party official.
The moves provoked reactions from the European Union and international organisations.
Freek Janmaat, head of the European Integration Section of the EU delegation to Serbia, told EurActiv Serbia that the speed at which the amendments were tabled puts into question their transparency and validity, given that there was little time for public debate.
"The Commission is deeply concerned by the new government's proposed amendments to the Law on the National Bank of Serbia, which revoke some provisions concerning the independence of the governor and the bodies governing and managing the National Bank of Serbia," Janmaat said.
IMF European Department Director Reza Moghadam warned the changes would create insecurity, tarnish credibility and raise doubts about the capacity of the country to run its macroeconomic policy.
Readiness for Reforms
S&P analysts also questioned the new government's management of public finances and financial arrangement with the IMF, which was frozen in February due to the previous government’s unwillingness to limit spending ahead of the elections.
"The downgrade reflects our view that Serbia's new government has failed to quickly adopt policies that would promote confidence in its monetary regime and restore post-election fiscal stability," S&P said in a statement.
"We are, moreover, becoming increasingly concerned that the new government may not be prepared - amid a recession and very high unemployment - to prioritise sustainable public finances and balanced economic growth," the agency’s analysts said.
The new government's policies could postpone talks with the IMF, which would provide Serbia with guidelines for improving the country’s finances and economy, as well as financial support, says the report.
More austerity needed
With public finances stretched, the national Fiscal Council recommended measures for saving € 1billion in 2012 and 2013, and an additional savings in 2014 and 2015, in order to avert a debt crisis.
Among the measures proposed by the council are the freezing of salaries and pensions and the increase of the VAT to 22% from 18%. World Bank experts agreed with that proposals, and pointed out the measures needed to be carried out as soon as possible.
Economy and Finance Minister Mladjan Dinkić on 8 August outlined austerity measures under which the VAT may be increased to no more than 20%, with the rate for food remaining at 8%.
Dinkić ruled out a freeze of public sector salaries and pensions before the elections, and this month he also announced that retirees with pensions below RSD15,000 (€127) will in September receive the first instalment of additional payments.
The minister also dismissed reducing the public payroll during a time of economic crisis. However, Dinkić did not rule out the possibility limiting the salaries of public-sector managers.