Serb government tightens grip on central bank despite EU, IMF warning

Reuters News

8/4/2012 11:55:50 AM - Reuters News

By Matt Robinson

BELGRADE (Reuters) - Serbia's Socialist-led government stepped up control over the central bank in the struggling ex-Yugoslav republic on Saturday, ignoring IMF criticism and a warning that the move would hurt its bid to join the European Union.

Parliament adopted amendments to the law on the National Bank of Serbia, as the government seeks to harness the bank to a promise of more expansive fiscal policies to halt a slide into recession and rein in unemployment of 25 percent.

Central bank governor Dejan Soskic, who since 2010 had steered a restrictive monetary course in the face of an increasingly bleak economic outlook, had already quit on Thursday.

The law creates a powerful, parliament-appointed supervisory body represented on the bank's executive board and gives the assembly responsibility for appointing its entire top management.

Jorgovanka Tabakovic, a lawmaker and senior member of the co-ruling Serbian Progressive Party, is widely tipped to replace Soskic, a move certain to shake investor confidence in the bank's independence even further.

It will also deepen doubts in the West over the new government's commitment to the largely reformist, pro-EU path Serbia has taken since the ouster of late Serb strongman Slobodan Milosevic in 2000.

The EU is watching closely, unnerved by the return to power of a socialist-nationalist political alliance that was last in government at the tail end of Milosevic's disastrous 13-year-rule, when Serbia was mired in war and hyperinflation.

The International Monetary Fund, which Serbia plans to tap for new funding, had warned before the law was adopted that it would mark a "major weakening" of the bank's autonomy.

"CONTROL BY THE PEOPLE"

The EU, which made Serbia an official candidate for membership in March under the previous Democrat-led government, said it would be a "step back" for the accession bid.

After the criticism, the government dropped one element of the new law that would have allowed the central bank to buy securities issued by the government or other public entities on the secondary market - amounting to the indirect monetary financing of the public sector.

But writing in the Serbian daily Politika on Saturday, U.S. Ambassador Mary Burce Warlick said the pressure put on Soskic and the changes to the law "represent a failure of the rule of law and raise serious questions about the respect for independent institutions."

The IMF, in a letter to Soskic before he resigned, cautioned that the law would have "considerable implications" for a 1 billion euro ($1.23 billion) loan program which the Fund froze in February over Serbia's rising debt but which the new government says it wants to renegotiate.

The coalition under Socialist Prime Minister Ivica Dacic says the bank's independence will not be compromised, but that it should work in closer harmony with the government as it tries to fire up an economy that contracted 1.3 percent in the first quarter of this year and 0.6 percent in the second.

Under Soskic, Serbia has the highest official interest rates in central and eastern Europe at 10.25 percent.

"I assure the domestic and international public that parliament will work openly, and as such the National Bank of Serbia will also work openly, and the law at its core does not encroach on the independence and monetary policy of the central bank," said Nebojsa Stefanovic, parliament speaker from the ruling coalition.

On the contrary, he said, the law "tries to limit the power of bank officials and increase control by the people." ($1 = 0.8104 euros)

(Writing by Matt Robinson; Editing by Toby Chopra)