Serbia Risks Rupture With IMF Over Oil Privatisation

Serbia risks facing dire financial consequences if it continues to drag its feet over benefits reform and the sale of two big oil refineries, economists and reformist politicians in the country have warned.

In a clear sign that it was starting to lose patience with Belgrade, the IMF on August 11 warned Serbian premier Vojislav Kostunica that it may suspend its credit arrangement, worth 900 million euro, if the sale of two refineries is not carried out by the end of October.

Despite pledges to act, Belgrade has been dragging its feet over the fulfilment of the conditions, risking the last instalment of the IMF funds.

Knock-on effects of a full-scale rupture with the IMF would include the Paris Club declining to write off a portion of Belgrade’s 700 million US dollar debt and a likely fall-off in much needed foreign investment.

Observers in Belgrade say it would also send a poor signal to the world ahead of forthcoming talks on signing a Stabilisation and Association Agreement, SAA, with Brussels in October, which is the first step towards eventual membership of the European club.

“Fulfilment of agreed obligations towards international institutions and consistent implementation of reforms are necessary for any country that is eager to build a democratic society, a market economy and become a full member of the European family,” one western diplomat commented.

The privatisation of the state oil company NIS is supposed to mark only the start of the privatisation of a long list of public companies, kick-starting a process that most other states in Eastern European have already completed.

Economists say a clutch of old state-owned behemoths, including NIS, Serbian Railways, Serbian Electric Company and the national air carrier JAT are monopolistic throwbacks to the communist era.

They are seen as a heavy financial burden on the state, as each of them employs thousands of workers, many of whom are effectively, though not officially, redundant.

The firms also symbolise the survival of close links between industry and politics in Serbia, which are increasingly out of place in a truly free-market economy.

As in the communist era, the bosses of these firms are still appointees of the ruling parties. These much sought-after positions bring the parties that hold them many privileges, including control over a considerable cash flow.

The IMF has made it clear it wants to see this practice consigned to the history books.

Kostunica's government signed the latest arrangement with the IMF in May. The deal obliged it carry out market reforms, with an emphasis on pensions, and the privatisation of the two oil refineries owned by NIS.

Belgrade dragged its feet over implementing the promises made to the IMF from the start. Meanwhile, NIS managers strongly criticised the IMF’s privatisation model, based on the sale of the two refineries.

Reformist officials responded to these attacks by warning that obfuscation might entail far-reaching consequences not only for Serbia's cooperation with the IMF but also for its EU aspirations.

“It is surprising to witness such signs of government weakness vis-à-vis the vested interests of certain individuals and groups from the energy sector on the eve of talks on stabilisation and association with the EU,” said Miroljub Labus, Serbia’s deputy prime minister and leader of the reformist G-17 party.

Labus’s words were contained in an open letter to the media, issued on August 11, complaining about the delays.

Kostunica's government replied by insisting that all the IMF requests will be met.

A decision should be made by the end of the week on the appointment of an official privatisation consultant for NIS. And the Serbian parliament should next week resume discussions on the existing law on the state oil company and the passage of a new law preparing the company for privatisation.

The Serbian energy ministry, which is in overall charge of NIS, advocates the privatisation of the company in its entirety – and not only the two big refineries, as the IMF proposed.

At the same time, the ministry has said it also wants NIS to remain a national oil company in some form.

The ministry backs a privatisation model that would limit foreign investors to controlling only a minority stake in the company’s shares.

They want the state to remain the majority shareholder in the new concern, which would leave the current management in place.

“We need privatisation in order to increase the efficiency of NIS operations,” said a ministry spokesperson.

“But we would like NIS to remain our national oil company in future, because this is what the country needs.”

The ministry said the final decision on the future of the company rested with the government.

However, experts in Serbia are warning that this vision of NIS as a privatised “national” oil company is not realistic.

“It is nothing but plain nonsense,” said Sijka Pistolova, editor of energyobserver.com, a specialised web site that monitors the energy sector in southeastern Europe.

“To keep NIS as a national oil company might be a good thing in a politically and economically mature society but Serbia is still far removed from this ideal,” she said.

“The state is rarely a good manager and in Serbia directors of public companies are still appointed on the basis of political eligibility.

“These companies serve the needs of the state apparatus and the ruling parties, whenever they need something.”

Pistolova went on to say that powerful lobbies in Serbia opposed transparent privatisations in line with western standards.

Many of these were tycoons from the era of Slobodan Milosevic as well as politicians with vested interests.

“In practice, every minister and ministry in Serbia has his own favourites and they may well undermine the appointment of a consultant for the NIS privatisation just to postpone the process,” he said.

Miroslav Prokopijevic, head of the Centre For A Free Market, warns that the consequences of forfeiting IMF confidence may be severe.

They include a shrunken state budget and a possible devaluation of dinar, the national currency, he said.

Before dispatching its warning letter to Belgrade in August, the IMF had already signalled unhappiness with Serbia’s economic affairs.

In a report on Serbia published on July 5, the IMF said that “the slow structural reform in Serbia is at the core of its macroeconomic imbalances and rigidities”.

The report went on, “Weak financial discipline in many public enterprises has reduced public savings and undermined the tight fiscal policy pursued at the central government level. Given the external financing constraint to investment, enterprise restructuring is increasingly important for growth and for the efficient reallocating resources within the economy.”

While the government drags its feet partly over fears of social unrest, reformists insist that it must try to distance itself from the culture of seeing public companies as part of the political rewards system.

“To view public companies as the political parties' spoils after successful elections is an enormous threat to the future of Serbia,” said Labus, in his open letter to the government.

Whether Belgrade is capable of getting to grips with this problem has yet to be seen, though time is running out for Serbia to fulfil its pledges to the IMF.

Daniel Sunter is a regular IWPR/BIRN contributor.