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UNDP: Regional Policy Roundtable “The Credit Crunch and Structural Adjustments: The Case of Serbia” Chisinau, Republic of Moldova 6-7 July, 2010 Miroljub.

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Presentation on theme: "UNDP: Regional Policy Roundtable “The Credit Crunch and Structural Adjustments: The Case of Serbia” Chisinau, Republic of Moldova 6-7 July, 2010 Miroljub."— Presentation transcript:

1 UNDP: Regional Policy Roundtable “The Credit Crunch and Structural Adjustments: The Case of Serbia” Chisinau, Republic of Moldova 6-7 July, 2010 Miroljub Labus

2  Recession is over, but not the crises  Nature of crises  Credit crunch triggered a crises in Serbia, which looks like a typical sudden- stop crises (Guillermo Calvo…)  However, structural deficiencies would in any case cause a downturn  Policy dilemma: Cure fundamental weaknesses or fight against recession by any means (structural or anti-cyclical approach)?  Nature of policy responses  Anti-cyclical fiscal measures, but pro-cyclical monetary measures (due to inflation challenges)  Appropriate prudential and supervisory measures, which were not sufficient  Weak structural measures  International support: On time and timely (IMF, Vienna club of banks), but the EU integration has been postponed  Politics: Weak government and poor policy coordination between the Government and the National bank Crises and Policy Response in Serbia: An Overview

3  Key macroeconomic figures  Key policy measures  Key structural deficiencies  Politics of the crises responses  Some concluding remarks Outline of Presentation

4 Recession is over, but not the crises GDP growth rates Source: IMF Source: Belox Modest recession in Serbia, but recovery is not robust and certain… …since the labor marker is in a deep depression (unemployment rate is 19.2%)

5 Source: IMF Macroeconomic Imbalances percent  Despite expected growth in 2010, reduction in macroeconomic imbalances will not continue  After dramatic adjustment in 2009, current account deficit will increase in 2010  Fiscal deficit is also expected to get worse in 2010

6 Macroeconomic Challenges: Foreign Debt “Is there life after debt?” (The Economist) Source: NBS Source: IMF  To borrow by the Government or not to borrow, it is the main dilemma  Tight public debt policy might be relaxed in 2010…  …but, is there a fiscal space for that?  In any case, debt presents a challenge for foreign exchange stability in the future

7 Policy response: Macroeconomic policy measures MeasuresBefore crisesDuring crises Fiscal measures Fiscal tighteningNoEasing Automatic stabilizersNoYes SubsidizingNot muchYes Monetary measures Reserve requirementsIncreasedUnchanged Raised liquidity requirementsYesUnchanged Sterilization operationYes Exchange rate policy responseYes Interest rate responseNo

8 Policy response: Administrative Measures in the Financial Sector MeasuresBefore crisesDuring crises Credit ceilingsNo Capital controlShort term capitalUnchanged Reserve requirements measures Increased the required levelYesUnchanged Marginal reserve requirementsTemporarilyAbolished Differentiated by currencyYesUnchanged Differentiated by type of depositsYesUnchanged Broaden the reserve baseYesUnchanged

9 Policy Response: Prudential and Supervisory Measures MeasuresBefore crisesDuring crises Prudential measures Increase capital requirementsYesUnchanged Tighten assets classification rulesYesUnchanged Tighten provision rulesYesUnchanged Targeting unhedged borrowingYesUnchanged Tighten net open position limitsYesUnchanged Loan to value related requirements for households YesUnchanged Limits on eligibility based on income level of households YesUnchanged Supervisory/monitoring measures Improving monitoring toolsYesUnchanged Stress testingNoYes Increase cooperation with home supervisors YesUnchanged Tighten supervision on non-banksYesUnchanged

10 Structural Deficiencies: Serbia and Others Source: IMF Source: EBRD  Structural deficiencies in Serbia might be compared to other transition economies…  …but the country’s risk is much higher.

11 Policy response: Structural Measures DeficienciesMeasures State of Affairs Before crisesDuring crises De-industrialization/ Huge non-tradable sector NoPresentUnchanged PrivatizationControversialPostponedReversed EuroisationIneffectiveHigh due to a dual currency system Increased Low domestic savingsNoPresentSome improvements Capital market developmentNoPoorUnchanged Rigidity in labor market and poor incentive structure IneffectivePresentWorsened

12  EU accession is not any more a driver for institutional reforms  Lack of full cooperation with the ICTY is more a formal excuse than a substantial reason for postponing the candidate status to Serbia  The six-party coalition government is at the mid-term  Institutional weaknesses:  Strong President, with no legal authority over economic issues, and weak Government  Poor policy coordination  General public is in a bad mood, and tired of reforms  March 2009 was the last momentum for structural reforms  Is there now an opportunity for transition losers? Politics and Structural Governance

13  False optimism: Out of recession does not mean the end of economic crises  Structural deficiencies undermined effectiveness of macroeconomic measures  High prudential standards are not sufficient to prevent financial crises  Coordinated international assistance proved to be of a high importance, but this is not a substitute for domestic reforms  Those reforms depend on a stable and determined parliamentarian majority (two-party election system?)  However, people’s frustration with the government might be the key barrier to such an end. Policy Lessons

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