“Houston, we have a problem…”

Great efforts have been made in the struggle against the COVID-19 (known as the new coronavirus) pandemic, to save lives and avoid the “Italian” scenario, the collapse of the healthcare system due to an overload of critical patients in a short period of time. Unprecedented measures for the restriction of movement and social contact have been introduced, and work for many businesses, especially small ones, is prohibited or restricted. Such measures are necessary because they save lives; their implementation therefore becomes the supreme imperative and an expression of patriotism and humanity for each of us.

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.