It should be recalled that representatives of Serbia’s executive authority, with the active participation of economic professionals, came forward very quickly with conceptual solutions for an economic support package. Although there was no public debate on the proposals, the comments of the interested professional public were partly exchanged through the media. The government then, after two weeks, adopted regulations establishing the legal framework for implementing the measures they announced.

The adopted legal framework established a very simple and quick implementation mechanisms of planed economic measures, which is of utmost importance in order to avoid long-term negative economic effects through timely state intervention. It is now necessary for the state to obtain the required financial resources as soon as possible and to implement these measures and to meet its regular obligations at all levels, and especially those obligations of public companies.

Within a month of the crisis, the excess liquidity of nearly €1 billion contained in Serbia’s budget has almost fully been utilized. Bearing in mind the expected decline in public revenues in the coming period, it is important to secure additional resources as soon, and in as much volume, as possible.

The absolute priority must be to provide liquidity from external sources, through:

• financial support from international financial institutions (such as the International Monetary Fund – IMF and World Bank), amounting to approximately €6 billion;
• bilateral agreements with creditor countries (including the EU, China, and the United Arab Emirates), amounting to approximately €5 billion;
• and the issuance of bonds in foreign capital markets as soon as they stabilize, in an amount that would be determined based on the relative price/maturity of the borrowing relative to other external sources and the current need for additional liquidity.

Why borrow outside Serbia?

An agreement with international financial institutions would help to consolidate the credibility of the measures taken so far, and to increase the confidence of investors and the business community. The proposed measures, including the measure of distributing €100 to all adult citizens, would not be hard to “defend” during negotiations with foreign creditors, with adequate justifications. In any case, a request to the IMF should be submitted as soon as possible, since a number of countries have already submitted or announced similar appeals to the institution. Given the limited resources of the IMF, not only in financial but also human terms, the government’s delay could slow down the negotiation process and the subsequent acquisition of necessary funds. An agreement with the IMF is particularly important, as it would facilitate additional bilateral borrowing, providing international credibility to the planned measures.

Outstanding liabilities towards existing creditors should be serviced by the state with new borrowing, prior to resorting to a moratorium. This would avoid jeopardizing the achieved level of financial market confidence and the increasing credit ratings of Serbian government bonds.

In parallel with negotiations with international financial institutions, Serbia’s relatively-good political relations with significant global political and economic centres should be used to acquire funds through bilateral arrangements.

Furthermore, priority should be given, this year and the next, to issuing bonds and lending in foreign markets over the domestic capital market in order to finance current liquidity and potentially refinance more expensive loans with other, more favourable loans.

An easier, but more expensive solution…

If the necessary resources for recovery measures were provided from within the country, there would be a greater number of negative consequences. This could be done through:

• a delay in the payment of state, public enterprise and local self-government liabilities;
• massive borrowing in the domestic capital market;
• the inadequate transfer of appropriations.

If any of these possibilities become a reality, or if multiple do, it is very possible that the effect of implemented measures would be weak, and that, despite the state’s efforts, the economy would sink into a deep recession accompanied by chronic illiquidity and high unemployment.

During the 2008 financial crisis, the economy had a significant problem with chronic illiquidity, as public enterprises and local self-government units with their utilities suspended and/or significantly delayed payments. Injecting money into the private sector while generating illiquidity in the public sector is pointless, as that illiquidity will inevitably spill over again into the private sector and completely cancel out initial measures. Public and utility companies are now under pressure from reduced revenues due to the delay of current liabilities for parts of the population. It is therefore vital for the state to find a mechanism to bridge this revenue gap, to avoid its spread onto suppliers or the private sector. At the same time, cities and municipalities are also suffering a significant decline in their own revenues, which may also threaten their abilities to meet obligations.

One possible solution for this issue is to increase the amount available in the fund designated for liquidity by the amount that public and utility companies lack, with a state guarantee. This part of the fund should be specially allocated to these needs, as well as to enable the relatively-easy issuing of bonds to enterprises and local government units, which would be supported by the state.

Although, according to the final calculations of the country’s banks, there is approximately €5 billion in cash and deposits with the National Bank of Serbia, there is not enough money for all planned government needs and the maintenance of liquidity in the economy. It should also be kept in mind that significant direct borrowing by the government in the domestic capital market not only draws on its liquidity, but directly, almost “unfairly” competes with the private sector, as banks always prefer to choose the state as a client. During the crisis of the past decade, this practice proved detrimental, as it largely hampered the government’s efforts to improve the liquidity ofthe economy through other mechanisms, which directly delayed the stabilization of payments and created prolonged illiquidity and unemployment in Serbia even when the crisis had already passed in most European countries. This is why it is of utmost importance for the state to be cautious in borrowing on the domestic capital market, and for the National Bank of Serbia to continue to significantly loosen its monetary policy by reducing banks’ minimum reserves, by massive repo operations and by selling domestic bonds in the range of up to €2 billion.

The transfer of appropriations, although in certain cases justified and necessary, must not be carried out in such a way as to create illiquidity, or to prevent the financing of projects for which procurement procedures have been completed and in which contractors have already engaged their capacities and started work.

We must not forget the most vulnerable parts of the economy

Of particular importance are the announced, but still undeclared, sectoral measures to support those industries that will be impacted significantly from the crisis in the long term, such as the tourism industry, including the hotel industry, catering, travel agencies, air transport, as well as parts of the agriculture sector, such as small wineries and specialized agricultural producers who directly rely on these activities. In these sectors of the tourism industry, revenue has fallen to zero and there will not be a rapid recovery of demand: pressure to maintain employment levels without significant government involvement is therefore completely counterproductive and could hinder the normalization of business. Sectoral measures should include the transfer of social costs from business to the state, the negotiation of longer deadlines for a moratorium on overdue financial obligations, significant tax relief, and, in particular, measures to stimulate demand for domestic tourism after the end of the health crisis.

Why is “€100” a good measure after all?

The majority of the planned measures are focused on preserving the structure of the economy during the crisis, especially in terms of employment, so that after the end of this current crisis companies can quickly return to conducting regular business.

On the other hand, stimulating aggregate demand by distributing €100 to all adult citizens (so-called “helicopter money”) can have significant positive effects on triggering the economic cycle at the end of the health crisis and following the normalization of economic flows, as part of the funds spent will quickly return to the budget through consumption taxes, primarily through the value added tax (VAT).

This measure may be questionable from the standpoints of social justice or political opportunism, as it does not take into account the differences in material conditions of Serbia’s citizens and is implemented shortly before the elections. However, it is important to emphasize that this measure is not an instrument of social, but of economic, policy, and that other democratic states are also seriously considering similar measures following the end of the health crisis. Its primary objective is to use a simple market mechanism to stimulate aggregate demand and increase consumer confidence.

Considering the delay in the obligation to pay for utilities for three months, granted to a portion of the population, it is very likely that the money provided with this measure will primarily be used to settle bills for utilities delivered during that period. Also, given the amount of funds provided, as well as the relatively-low level of disposable household income in Serbia, it is unlikely that this money will be largely directed towards the purchasing of more expensive or luxurious (imported) goods.

In fact, it is far more likely that this measure will further encourage households to spend their own funds more freely on local craft services, market purchases, going to cafés and restaurants, and other similar activities, which will directly result in the further acceleration of the economic cycle, particularly in those segments of the economy that are principally of a local character.

The author, from the European Policy Centre, is the coordinator of the Working Group of the National Convention on the European Union for conducting Serbia’s EU accession negotiations for Chapters 4 (Free Movement of Capital) and 9 (Financial Services) of the acquis communautaire.

Članak How not to spoil good measures? se pojavljuje prvo na European Policy Centre.

Unfortunately, the deadly impact of the virus is also rippling through the Serbian economy, especially in the private sector. In order to prevent a complete collapse of the economy and the loss of a vast number of jobs, urgent and decisive action by the state is needed: a kind of “financial counter-strike” against COVID-19. The American Central Bank, the Federal Reserve, is in the process of completing a series of measures worth approximately $4 trillion, accounting for nearly 20% of US GDP. In the EU, according to the plans currently available, such measures currently reach €1 trillion; strict budgetary rules have been abolished and the General Escape Clause has been introduced, allowing all Eurozone countries to “pump” as much money into their economies as is necessary to preserve a healthy economy. Experts are also referring to the “money rain” scenario increasingly often, which becomes the National Bank of Serbia’s tool of last resort for defending the economy in such circumstances.

Already two weeks after the declaration of the new coronavirus pandemic it is clear that we are in a game of big numbers and high stakes. Cosmetic, gradual or partial measures will therefore not be sufficient for the task at hand and may even be counterproductive. What is needed is coordinated intervention by fiscal and monetary authorities, to the tune of billions of euros, in concert with international financial institutions and based on the examples provided by the world’s most developed economies.

Time is not on the Serbian economy’s side. Austria announced a few days ago that 50,000 jobs had been lost in a very short time. A significant portion of our businesses is already “clinically dead”, unable to meet their obligations to banks, employees, the state and suppliers. The virus not only caused a general drop in revenues but in many cases their complete absence. The situation we find ourselves in is not due to greed or mismanagement – it is a natural disaster and state action is necessary.

Thanks to fiscal and monetary consolidation policies thus far, as well as economic growth and domestic management of public funds, Serbia’s public debt has been lowered significantly and now stands at around 52% of GDP. This means that Serbia currently has at least 10% of GDP (€4-5 billion) at its disposal to borrow further, which, through targeted, efficient and timely intervention measures, can preserve jobs and the hard-won stability of the economy and the financial sector. Serbia’s foreign exchange reserves are also high and almost twice surpass the dinar money supply (M1), potentially covering six months of importing goods and services. Thanks to such foreign exchange reserves, Serbia can prevent the collapse of its economy through monetary “yielding”, a series of dinar emissions. At the same time, through interventions in the foreign exchange market, the state would guarantee exchange rate stability, thus eliminating pressure on prices.

Big problems will arise if the state, currently lulled by increased VAT revenues in March this year (based on panic-induced “mega-turnovers” in retail caused by fears of the pandemic and shortages), overlooks the real situation and delays intervention. This sudden, extraordinary budget revenue should rather be understood as the tides pulling back before the tsunami strikes, as it will be followed by a period of dramatically decreased public revenues. Already in April a dramatic decline in public revenues is to be expected due to a lack of payments of wage taxes and contributions in many sectors of the economy. An absence of tight coordination between monetary and fiscal authorities, or a lack of alignment with international financial institutions may also diminish the effectiveness of government efforts to prevent economic collapse. Exposing the banking sector to measures that draw on its liquidity can dramatically accelerate a downward spiral of negative economic developments and adversely affect the stability of the entire system.

What follows are ten possible interventions that can effectively and quickly mitigate the consequences of the crisis. These measures must certainly be elaborated upon in more detail by professional government bodies and through rapid, expert, public discussion, but it is important that unnecessary administrative restrictions are not introduced in the process of their implementation. Furthermore, complicated procedures should be avoided, and the urgency of the situation should be taken into account. The measures should be as simple as possible and implemented as easily and as quickly as possible to avoid collapse.

1. Suspension of payment of all payroll burdens (taxes and contributions) in all active private companies, up to the average gross wage per employee, with simultaneous reductions on public sector wage burdens to the level of the average wage paid in the private sector, for up to 3 months for employees that are not directly related to combating the epidemic.
2. Suspension of lump-sum payments for entrepreneurs for up to 3 months.
3. Suspension of utility bills for up to 3 months for micro and small businesses.
4. Reprogramming of loans and leases for up to 12 months with payment suspension for 90 days for all business entities.
5. Reducing the cost of leasing government office space by 50% for crisis-hit retail stores.
6. Refunding of (the fiscal part) of fuel costs for freight transport companies.
7. Suspension of the payment of advance tax on profits for the current year for all economic subjects.
8. Provision of a National Bank of Serbia credit line for additional bank liquidity of up to €2 billion without interest.
9. Building an administration responsible for the disbursement of public investment funds for which non-budgetary funding is provided, in order to realize payments as soon as possible, with a parallel review of all planned investments to be financed from the public funds by more than 10%, as new economic circumstances require the urgent determination of new priorities.
10. Suspension of payment of housing loans for up to 3 months for citizens.

For the implementation of most of these measures, it is not necessary to immediately provide funds – it is sufficient to approve tax credits. This leaves enough time to secure the money to finance the deficit that such measures would produce.

An estimate made for the purposes of this text shows that these measures would induce €3-5 billion (5-10% of GDP) of debt and €1-3 billion spent on foreign exchange reserves for Serbia’s government.

Currently, there is no need for interventions in the VAT segment, because every market participant able to create added value is able to pay taxes and liabilities incurred on that basis. Still, this area needs to be reconsidered once the immediate danger has passed and when the economy will require a flywheel, especially in the tourism and hospitality sectors and part of the retail sector.

The proposed measures have no obvious negative effects other than an increase in Serbia’s external debt and/or a decrease in its level of foreign exchange reserves. It should be borne in mind that reserves and fiscal borrowing space are, in essence, public policy instruments whose primary purpose is to enable the state to intervene in extreme situations such as this one, thus preventing economic collapse.

It is essential that the state comes forward with concrete measures as soon as possible since the only correct course of action is to support economic activity, preserve jobs, financial stability and public revenues through the socialization of losses. The relatively mild reaction of the state during the last crisis of 2008, when we partially and slowly introduced measures to help the economy and spent large sums on the pre-election expansion of pensions and public sector wages, proved to be a complete debacle, and so Serbia felt the crisis far longer than other countries, accompanied by a skyrocketing of public debt.

This battle, just like the one for the lives of our citizens, we must not lose!

The author, from the European Policy Centre, is the coordinator of the Working Group of the National Convention on the European Union for conducting Serbia’s EU Accession Negotiations for Chapter 4 – Free Movement of Capital and Chapter 9 – Financial Services.

Članak “Houston, we have a problem…” se pojavljuje prvo na European Policy Centre.

The plain interpretation of the referendum result is that the majority of those that came out to vote, and that chose the formal withdrawal of the United Kingdom from the EU, no longer want to make joint political decisions with other EU countries. Accordingly, they would no longer like to contribute to the common budget. But, does this interpretation of the question answer all of the uncertainties? If one considers all of the rights that arise from being a Member State, and from being a citizen of the EU, the British seem to also support the payment of customs tariffs on their return from shopping in Paris or Milan. Or, perhaps, they are against the right to, in old age, buy a house and freely move to the warm coasts of the Mediterranean. Or, it may be that they support cuts in funding cuts for scientific research, as the country’s scientists will lose access to EU supported grants. Or, they perhaps oppose the right of the British youth to seek employment in other EU countries. Or they take issue with the banks and financial institutions – upon which the influence and power of the City of London rest – and think they should no longer have the right to freely conduct business and provide services in the world’s biggest market – the EU market.  In addition, we can ponder whether they voted for the inability of British airline companies, and especially the low cost ones, to operate and fly between the European cities with ease.  The voters, maybe, wanted to join the passport lines that are formed across Europe by the citizens of Pakistan, Turkey, Tajikistan, Bangladesh…. The uncertainties are countless, and the result of the referendum does not give an answer to any of them. The only conclusion that one may come to is that the UK cannot, de facto, disentangle itself from everything that the EU represents, because, after all, Britain is a part of Europe.

The British government is not in the position to request additional concessions in regards to the freedom of movement of people while demanding access to the single market. (It seems that 2.2 million EU citizens that currently live in the UK can breathe a sigh of relief.) Moreover, taking the example of Norway, which still has to pay into the common budget of the EU, it is almost impossible to expect that the UK will be relieved of this obligation in full. Even though Britain will no longer participate in the creation of policies that govern the single market, it will have to comply with EU regulations if it wishes to maintain access to it. Free access to the single market is, simply put, too lucrative – it creates jobs and opportunities for everyone, and increases government revenues – thus the „costs“ associated with the it are absolutely minor in comparison. In addition, around half of British foreign trade is conducted with other EU Member States. Thus, there is a possibility that a change in these trade relations might impact the UK labour market negatively, and especially those jobs that are directly or indirectly related to trade with the EU (especially in the private sector).

Unfortunately, what has been achieved by the leave vote so far is a drastic devaluation of the national currency, and a dramatic drop in the stock prices – specifically in the airline and banking sectors (so much that their trading had to be halted for a period of time). The Brexit vote also lead to a downgrade in the country’s credit rating and thus increased the level of interest rates the UK has to pay on future loans. At the same time, due to the drop in the value of the pound, the UK is in danger of losing its position as the fifth biggest economy in the world to France. Furthermore, the vote has split the country like never before, exposing a divide between the young and the old, the Scots and the English, the City of London and the less developed parts of England and Wales. As a consequence of the falsehoods used by the leave campaigners, as well as the absolute inability of the remain supporters to properly present the benefits of EU membership, the credibility of the political establishment has been (almost) completely eradicated. The leave supporters used the accession of Turkey, Serbia and Albania to intimidated their voters, thus managing, ironically, to put the UK in the same position – at the doorsteps of the EU, negotiating its relations with it.

The United Kingdom is now faced with serious difficulties, without allies, with a PM that resigned, with turmoil within its political parties. It is divided, impoverished and confused, and has experienced an increase in hate crimes towards those that look „different “. It is now confronted with an uncertain future. Those of us that did not cast a vote, the observers, can only come to the conclusions that the British population expressed its disappointment with Brussels and that the EU has a number of flaws. Nonetheless, we will now have the chance to clearly see what the alternative to the EU looks like and where it leads to.

The consequences of the referendum in Britain show that it is neither wise nor useful to leave the European project – a project that brought peace and order to the Old Continent, whose future was, at the time of EU’s inception, less than promising.  The European Union is first and foremost a peace project. one that has had a positive influence on our lives and our welfare. It is a project that we must continue to develop, improve, innovate, and change for the better, making it more efficient and more beneficial for us, the citizens of Europe.

Članak What does BREXIT really mean? se pojavljuje prvo na European Policy Centre.