The government said it would ask the IMF during the upcoming programme review to increase the 2009 budget deficit to 4.5% of GDP from 3.0% of GDP. An IMF mission is due to start reviewing Serbia's programme performance on 24 August. IMF resident representative Bogdan Lissovolik said the Fund would require credible and sustainable government policies in order to consider any changes to the stand-by programme. Meantime, cabinet minister appeared divided over how to improve the budget situation. Finance Minister Diana Dragutinovc said that she had not ruled out personal income tax hikes. In contrast, Prime Minister Mirko Cvetkovic and Economy Minister Mladan Djinkic said spending cuts would have to be considered before tax hikes.
The initial response from the IMF representative suggests that the Serbian government might find it difficult to gain the Fund's approval of a bigger budget deficit. The IMF agreed to bigger budget deficits in Hungary and Romania, but in both cases the governments offered fiscal tightening and a high degree of programme compliance in return. The Serbian government, on the other hand, seems to lack a common position on how to tackle the budget deficit. In addition, the case for a bigger budget deficit seems not unambiguous in our opinion. The budget deficit amounted to 1.8% of GDP at the end of July, which suggests that the 3% deficit target could be achievable. However, we are at the only the beginning of the process and the IMF's has been more accomodative to debtor requests than in the past and therefore we believe that Serbia could have a bigger deficit approved, assuming the government is prepared to either cut spending or hike taxes.