The International Monetary Fund has written to Prime Minister Vojislav Kostunica, warning him that loan Arrangements will be cancelled if Serbia continues to default on agreements, B92 reported.

Unless conditions agreed on by Kostunica’s government in May are met within a deadline of two months, the present three-year credit deal will be terminated, the IMF warned. This means that, by the end of October the government must implement promised reforms of the pension system and begin the sale of two oil refineries.

If the IMF pulls out of the three-year arrangement, the loss of the next nine-hundred million dollar tranche of credit will not be Serbia’s greatest problem: termination of the agreement would also annul plans to write off part of the country’s debt to the Paris Club of creditors.

Dire consequences
The IMF’s representative in Belgrade, Harald Hirschoffer, says that the government accepted signed the conditions in May in a Memorandum on Economic Policy.

“The IMF Board of Directors, which makes decisions about arrangements, took this as a signal that there was resolve in the Cabinet to implement the reforms which were sought. Within weeks of the IMF Board approving continuation of the arrangement, we could see that this resolve really didn’t exist when it came to reform of the Oil Industry of Serbia and this reform was in fact the critical issue reviewed by the board when it approved the last extension of the arrangements,” he said.

The director of the Free Market Centre, Miroslav Prokopijevic, believes that breaking relations with the IMF would have very serious consequences.

“Less budget revenue, a blow to the dinar, which will be hit either by short-term devaluation or quickly become worthless. That would be a signal for foreign investors to pack their bags quickly and see what’s going on. At the same time it would mean that a seven hundred million dollar debt to the Paris Club won’t be written off,” he said.

Hirschoffer pointed out that the IMF is not asking for the sale of two oil refineries to be completed by October, but wants the process to be started by then. It would be adequate, he says, for a privatisation consultant to be engaged.