Serbia's Foreign Debts

Mral and Immoral Borrowing

By Dimitrije Boarov

This November any careful observer of economic debates in Serbia must have noticed an unusual polemics between the advocates of intensified borrowing from abroad (to overcome stagnation) and those taking we have already entered a dangerous zone leading to "debt slavery." For instance, when Serbia's President Boris Tadic said (November 23 in Leskovac) that "we should stick to moral principles while borrowing," adding that "it's morally justified to borrow money from which the generations to come will profit" he actually polemicized with, say, the stance of economist Mladjan Kovacevic (Politika, November 1, 2009) who said, "It is immoral to borrow from abroad the money that will be squandered now and pass the payments of installments to future generations."

Of course, what triggered off the polemics over morality and immorality of new debts were Serbia's negotiations with the International Monetary Fund (which allegedly ended in success in early November) and the announced borrowing from China and Russia. To start with, one should know that the 2-billion-Euro agreement with IMF for the period of two years was detailed and signed, but whether or not it will be realized depends on Serbia's government will and ability to implement the policy of reduced public expenditure and carry out the reforms in fiscal and pension systems it has promised to many times. And the pro-forma contract on an investment credit with China - in the amount of some 170 million Euros - for construction of a bridge over the Danube nearby Zemun has also more or less precisely determined the positions of both parties. However, the political agreement between Russia and Serbia on a one-billion-USD credit from Moscow (200 millions to cover budgetary deficit and the rest for infrastructural investment) - promoted with much pomp during the visit by Russian President Dmitry Medvedev in late October - remains blurred even after initial rounds of unsuccessful "technical negotiations" in Moscow and Belgrade.

The polemics over Serbia's high foreign indebtedness cannot be properly understood out of the context of "geopolitical anxieties"over its wavering search for both new and old creditors worldwide. In the structure of Serbia's present foreign debt amounting to 21.72 billion Euros the so-called public (state) debt totals 6.87 billion while the rest are various credits to companies, the payments of which are not guaranteed under the state budget. That means that, for the time being, participation of the public debt in GNP amounts to tolerable 30.6 percent. Hence, it could be said that may take new loans to pay off old scores (without pressuring companies jeopardized by the global crisis) and to fund public works by which the national economy counteracts recession.

However, an overview of the origin of these foreign debts cannot but make one suspect that the aforementioned polemics only veils domestic policy and even geo-political speculation. Namely, Serbia's biggest foreign creditors so far have been the World Bank (1.6 billion USD), Paris Club (1.58 billion), IMF (770 million), IDA (469 million), European Union (223 million), European Investment Bank (550 million) and Eurofima (328 million). Taken all together, credits from the states and international financial institutions "from the West"amount to 4,520 million dollars. This plus some 20,000 million USD Serbian companies ("private debt") have borrowed from the West clearly indicates that has received practically all of its "foreign financial support"from West - and that the announced financial support from "the East"has mostly been well-though-off political advertising. Saying, however, that every critic of Serbia's foreign indebtedness is fearing "the state's financial dependence on the West" wouldn't be fair, the same as it wouldn't be proper to spread panic over Serbia's new and by far lower indebtedness in the East - which is actually still uncertain. And yet, some critic probably has all this in mind.

Somewhat more telling "political interpretation"of Serbia's foreign indebtedness comes from certain analysts who draw attention to the fact that Serbia's foreign debt after Milosevic's era, in 2000, amounted to 11.66 billion Euros (including 9.47 billion of public debt) and that, after "a democratic decade"it owes 27.72 billion Euros - in other words, that "democracy"doubled the nation's indebtedness in nine years only. The illusion that the state is presently more dependent from the world and more exposed to "blackmail from abroad" is easy to dispel. Firstly, one should bear in mind that by the end of Milosevic's era Serbia has been actually bankrupt - it was due to pay off 96 percent of its foreign debt but could pay off nothing at all. Second, in 2000 Serbia's public debt amounted to as much as 169.3 percent of the then GNP, which means that in the past decade its burden on Serbia has become by five times less heavy.

All this leads to the conclusion that Serbia has to continue to take foreign loans - from the West or from the East, depending on conditions and benefits - and that it could still afford the luxury regardless of the fact that every indebtedness is risky. Stalled reforms and development for the sake of saving would be the biggest risk of all.