Dejan Šoškić, Economist

IMF Managing Director Kristalina Georgieva stated recently that, due to COVID-19, the economy has changed so much in just a few months that we can hardly recognise it. In light of this, we spoke with economist and former National Bank of Serbia governor Dejan Šoškić about the options available to Serbia as responses to a crisis that doesn’t resemble any of those we’ve previously faced.

What does it make sense to do in the situation that we have today, and with the economic structure that we have?

Due to Serbia’s economic shortcomings, the structure of its economy, and the very low level of GDP per capita, it is, as a rule, somewhat “more resilient” to economic crises, i.e. it will probably have a smaller decline in economic activity than some other countries due to the pandemic. In simplified terms, this means that if you don’t produce sophisticated and expensive products, but rather the largest part of your GDP comprises basic necessities of life that people can barely relinquish, such as unprocessed and processed foods, electricity and simple services and products intended for the domestic market – in such poor economies a crisis, , as a rule, has a reduced negative impact.

In more developed economies, which produce more expensive and complex products that depend much more on uninterrupted lines of international trade and whose consumption is more easily relinquished (durable consumer goods such as cars and other vehicles, televisions, electronics, home appliances etc.), or which have highly developed tourism, hospitality, transport and production branches related to these most vulnerable sectors, the decline in economic activity as a result of the pandemic will, as a rule, be greater. Serbia must preserve and perhaps increase its public investments, and must do so in domains that will have an enduring positive impact on future economic activity and the quality of life of citizens. That doesn’t only mean roads, but also the renovation of railways, regulation of watercourses, investments in environmental projects, in health, education, science. In addition to that, the state should strengthen the social function of helping the most vulnerable citizens and should support individual companies very discerningly, i.e. selectively and only where that is justified in the long term on the basis of solid analyses.

What sorts of borrowing options are available to Serbia if it opts to intervene in the economy again?

Serbia can receive some funds under relatively favourable terms from international financial institutions, the EU and some other sources, and it should utilise that. But the conditions of normal market borrowing are obviously changing rapidly and we see that the conditions of borrowing for Serbia now in May (3.375%) were significantly less favourable than those that Serbia could have achieved at the end of last year (1.25%). Trends in the movement of debt and GDP in Serbia are extremely unfavourable, because debt is rising and GDP is falling, and we will probably welcome the end of the year with a level of debt to GDP that exceeds 60 per cent. This clearly indicates that Serbia is very close to the limits of additional borrowing.

I wouldn’t rule out the possibility that regulating the public sector alone (by eliminating irrational expenditures and corruption) would be quite sufficient and that salaries and pensions shouldn’t even be touched.

As such, it is important to continue and deepen incomplete structural reforms in the public sector without delay, and to significantly strengthen the rule of law, because irrationality and corruption within the public sector represent a significant reservoir of unacceptably wasting taxpayers’ money, which should be preserved and redirected towards public investments and the social protection of citizens. Revenues in the public sector should also be regulated, perhaps according to the model of pay grades, with which we in our country have historically had, I would say, mostly positive experiences. Only after that would it make sense and be morally justified to take measures that move towards reducing the income of citizens. What is the point in reducing incomes for citizens (salaries and pensions) without first regulating the system and halting corruption? I wouldn’t rule out the possibility that regulating the public sector alone (by eliminating irrational expenditures and corruption) would be quite sufficient and that salaries and pensions shouldn’t even be touched.

What should be the aim of supporting the economy – extending the chances for companies to survive until the situation normalises, or an incentive for the transformation of the economy, and if so in which direction?

When it comes to further support for the economy, we should be aware that state funds are now limited and that it only makes sense to give support to individual companies quite selectively and once, and only in exceptional cases and on the basis of thorough expert analyses. We must take into consideration that the normalisation of the situation will probably require at least another 18 to 24 months, and that continuous and non-selective assistance from the budget is not possible.

The aim of the support should primarily be to extend the chances for the survival of businesses vital to the economy. Incentives for transformation should be sought in the domain of private and market sources of financing, while the state’s role in that should be limited to the level of the possible issuance of partial individual guarantees of receivables from these businesses. But even there we should be conscious of the fact that every state guarantee is included in calculations of public debt and that possibilities are limited in that domain.

Given the course of the crisis so far, how certain does it seems to you that some new blockages of illiquidity will be created in the economy?

I expect some new and previously unforeseen negative impacts of the pandemic to occur in the autumn, as a consequence of job losses, disrupted supply lines and falling demand. That’s why it’s important to advance available resources and simplify access to social assistance. It’s important for the state to show that it’s in a position to effectively take care of the most vulnerable citizens for humanitarian reasons, but also for the purpose of preserving social peace in the country. With regard to “illiquidity blockages”, it could perhaps be important to ensure that all recipients of state aid have to regularly pay their obligations to suppliers, employees and the state, in order to prevent the unjustified spreading of the illiquidity crisis through the economy.

What do current statistics on economic activity, collections of taxes and contributions, and similar indicators tell us about the possibility of Serbia to regularly service its public debt obligations?

The economy had a relatively high growth rate in the first quarter of this year (though partly due to the low growth rate in the first quarter of last year), but a decline came after that, and that decline will continue and probably deepen by the end of the year. The first effects in the collection of VAT after the introduction of the state of emergency were relatively positive, with the population increasing its consumption in the initial period of the pandemic due to uncertainty and stockpiling. Now, however, consumption is falling and it should be expected for this trend to continue, i.e. in the coming months we should expect a further decline in consumer spending and economic activity, and, consequently, budget revenues.

A strong and independent Fiscal Council and, if possible, an active programme with the IMF are two channels of influence that should help the government advocate for and implement a sustainable fiscal policy.

The fall in GDP this year will not cause the country to lose its ability to service its obligations regularly, but next year it will be necessary to stop any growth in debt, reduce the fiscal deficit significantly and ensure at least modest economic growth, and thus return the country to the path of strengthening its fiscal position. It is highly likely that the positive shifts in the country’s fiscal position, achieved in recent years, will be largely annulled by the end of this year. It is therefore important to seriously address structural reforms in the public sector, with an emphasis on strengthening health and education, but also a significant increase in the country’s capacity in the domain of the rule of law, i.e. the efficiency of the legal system.

You’ve stated repeatedly that it’s important for the state to strengthen its social function and make social assistance more quickly available. What would that mean in practical terms?

I think it’s important for social assistance to be received more easily; for the social administration to be capable and accommodating when it comes to identifying every socially endangered household in the country; for socially endangered citizens – via soup kitchens, social care centres and other types of direct assistance – to more easily overcome the coming winter, during which we can expect emphasised health and social challenges.

Where is the limit of healthy budget spending in the newly emerged situation and how can that be controlled in an (almost) one-party parliament?

The dismantling and weakening of the institutions of the system, the absence of social dialogue, public debates, freedom of the media and the fading of effective parliamentarianism are bad and unacceptable trends in our society, which create social tension and inclinations towards non-institutional processes, and that’s not good. Many social processes currently underway, but also public finances, should be subjected to active and constructive debates in parliament, in the media and in other institutions.

Because of this it’s extremely important in Serbia to preserve and strengthen the independence and capacity of the Fiscal Council, but also communication and, if possible, an active programme with the IMF. These two channels of influence should help the government advocate for and implement sustainable fiscal moves and a policy of stabilising and strengthening Serbia’s fiscal position.

It is plainly obvious that many citizens and companies will be in trouble when it comes to repaying the loans they’ve taken out. In that context, how would you comment on the latest measures of the NBS? How much will they help debtors and banks themselves?

Some of the measures adopted by the NBS in recent months make sense and help under these pandemic conditions. Here I’m referring primarily to lowering the reference interest rate and other interest rates that are influenced by our central bank, but also to the active role of the NBS in encouraging a moratorium on loan repayments. Truth be told, interest rates could have been lowered earlier, and the moratorium might have needed to unburden borrowers more, but the basic direction of these measures is good. Some other measures, however, such as reducing the down payment for mortgages, I don’t think will help citizens, because in practise they boil down to easier over-indebtedness of banks’ clients under the conditions of an impending reduction in economic activity and employment. This, of course, is not in the interest of either the borrowers or the banks. and I hope banks will not utilise this opportunity when approving loans to citizens. This may benefit those who build and sell apartments, because it can raise demand on the market artificially, but the NBS should not give priority to such interests with its measures.

The measure by which the NBS itself is now allowed to buy illiquid long-term corporate bonds from banks secondarily could turn into a mechanism for creating non-transparent losses on the part of the NBS.

On the other hand, a not entirely good measure is the one by which the NBS itself is now allowed, within so-called open market operations (apart from the pre-existing possible purchase of government securities), to buy illiquid long-term corporate bonds from banks secondarily. Specifically, under our conditions of an absence of a liquid bond market, this can turn into a mechanism for abuse and the creation of non-transparent losses on the part of the NBS, i.e. taxpayers, in the final instance. Such opportunities on the part of central banks, allowing central banks to buy corporate bonds, are very rare around the world. And when they are allowed, that is done under the conditions of the implementation of so-called quantitative easing and on condition of the existence of full liquidity of such corporate bonds. Such conditions do not exist in Serbia. Quantitative easing isn’t being implemented and no secondary liquid bond market exists.

We’ve heard various economists say on numerous occasions that it is important to have one bank that’s owned nationally precisely due to the possibility of situations such as this arising, and we have just sold Komercijalna Bank. Was that the wrong move from this perspective?

In my opinion, that wasn’t the wrong move at this juncture. The alternative to that move was to keep that bank under dominant state ownership. However, Serbia has shown very clearly over the years that it is incapable of effectively protecting state property, i.e. taxpayer property. That’s precisely why it is very important to elevate the rule of law, strengthen institutions and free them from the influences of interest groups and political parties. Because only under such altered conditions would it be possible to carry out the effective corporatisation of companies in the public sector, and only then would those companies be able to be more resistant to corruption and the placement of incompetent people in decision-making positions. Under those sorts of more favourable conditions it would make sense for a dominant state-owned bank to exist in the banking system.

As things stand, I think it’s good that this state bank has been privatised. I believe that had this not been done and had the bank remained under dominant state ownership, it could have – after the withdrawal of international financial institutions from its ownership structure – easily got into a position to be the subject of abuse from interest groups in conjunction with some political parties. With such a risk existing, any further delay in the privatisation of this bank would, in my opinion, have led to a further loss in the bank’s value and a possible situation that would see this bank worth much less in a couple of years.

Let’s return to the IMF, with which we started this interview. The current “housekeeper” programme that we have with the IMF will officially expire in January 2021. How effective has this programme been and what should Serbia strive for if it enters into a new arrangement with the IMF?

It’s good to have a competent advisor with authority regarding the sustainability of the economic policies that are pursued in the country. In that sense, I think it’s useful for a country like Serbia to have good and active relations with the IMF, and I think that entering into a new programme next year that’s similar or the same would be useful. However, we should be aware that the reforms that need to be carried out in our country extend beyond the nature of the IMF’s mandate and that they must be broader and more comprehensive than that which is at the centre of the IMF’s interest, which – let’s remind ourselves – is the long-term maintaining of international liquidity. i.e. the country’s ability to settle the obligations it has abroad. We must hence understand that the measures advised by the IMF do not encompass all the reform measures that our country needs to take. We must define and implement comprehensive reforms ourselves, and well-defined reforms will certainly have the support of both the IMF and the EU.