Public spending and its monitoring

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Usually, a country enters into an arrangement with the IMF when it lacks money to finance its budget deficit. Let's say, a country predicts high public spending that it cannot finance with regular revenues (mainly taxes), and then it has to borrow on the international money market. During 2022, Serbia really had problems with foreign debts. Even a loan of one billion euros from the United Arab Emirates with a low interest rate of three percent did not help. Thus, in 2022, Serbia requested a new one from the IMF standby arrangement in the amount of 2,4 billion euros. By the way, this is the fifth arrangement with the IMF since 2001.

What does the IMF ask of a country if it decides to approve the arrangement and the money? The IMF agrees to such arrangements in order to enable countries that have difficulty repaying international loans to avoid bankruptcy, i.e. prevented a situation where the country cannot repay the loan. In order for the IMF to assess a country's ability to repay international loans, it is mainly focused on one thing - risk assessment. The IMF is wondering: can the country pay back the loan it received?

KEY WORD

Of course, as soon as a government turns to the IMF for help, there must be a risk. If the IMF approves the loan, then it has the right to require the government to conduct certain public policies that will prevent the risk from increasing. This is the meaning of the so-called audits, which then take place through meetings with the Government of Serbia and other important institutions dealing with public spending and economic policy. Once the goals of the arrangement are defined, the IMF continuously monitors public spending and negotiates with the government so that it does not get out of control. The audit is first agreed upon (the government and the Fund agree on what to do in the next few months), and then concluded (if everything is fulfilled). So, this last, third review, which was agreed on March 26, 2024, means that the government and the IMF have agreed on what will be done (ie what will not be done) in the next few months. If the government fulfills everything agreed, it can get a part of the money from the agreed sum.

Risk, as we see, is the key word for understanding what the IMF does in a country. He is less interested in economic well-being, poverty, the position of workers on the labor market, the fulfillment of election promises by a given deadline or comparison with countries in the region. A country may have a greater or lesser number of poor, a greater or lesser GDP, it may be more successful compared to other countries (measured, for example, by GDP, income or some other indicator), but all this has less importance for the IMF if the country it is not risky for the return of foreign debts, i.e. if both public debt and public spending are within realistic limits. These things only become important if the risk is judged to be significant.

Since this arrangement was signed in December 2022, the Government of Serbia has already successfully completed two audits. This happened precisely during the year 2023, when the public often claimed that the economic situation was bad. For example, during the second review, the IMF advised the Government of Serbia to be careful with spending, not to spend IMF funds unless necessary, to maintain the budget deficit in 2024 at 2,2% (and in 2025 at 1,5% ), continue to reduce inflation, reduce the current account deficit, increase salaries and pensions in accordance with fiscal rules, reduce public debt and implement structural reforms (especially in connection with the transformation of the EPS).

The Government of Serbia respected this agreement. During 2023, GDP continued to grow (2,5%), inflation decreased significantly (5,6% in February 25), and foreign exchange reserves also increased (to 2023 billion euros). The IMF is also satisfied with the control of public finances. Although during XNUMX (and earlier) there were frequent ones spending motivated by political and electoral reasons, the Government of Serbia, according to the IMF, maintained financial stability.

The IMF is also satisfied with the structural reforms, especially the corporate governance reform in EPS. The government transformed this company from a public company into a joint-stock company with a shareholders' assembly in which only one government representative sits, thus centralizing the management of EPS. With that, it completely took over the management and excluded the unions from the management of the EPS. It seems to have borne fruit. EPS ended 2023 with income, and the IMF praised the government for structural reforms.

In this third revision, there remains one risky matter to which the IMF has paid a lot of attention. It is the budget project of Expo 2027. The IMF has given its approval for this project and even approved that it spends more than planned, provided that the financial risk, which it can cause due to its size, is well managed .

As is known, the Expo 2027 project represents a type of capital investment (a total of 18 billion euros). The Government of Serbia passed a special law according to which all public tenders for projects related to the Expo are exempted from the system of public tenders and are regulated by a government decree. This decision opens wide space for corruption and extraction of public funds, which can burden public finances and threaten the country's fiscal stability. The IMF does not mention this law and regulation in its reports.

MECHANISMS AND THEIR CARRIERS

True, in the past few years, the government adopted several new mechanisms for assessing fiscal risks and monitoring capital investment projects, about which our public knows little. It is about the Altman Z-score and the Public Investment Management System (PIMIS). The Altman Z-score is actually a simple weighted formula that assesses the risk of insolvency of (public) companies. PIMIS automates the evaluation and monitoring of capital projects, reducing fiscal risks. It is also planned to improve it in order to adapt it to the new legal framework and include projects from the pre-implementation phase.

Although it is still available exclusively to budget users implementing capital budget projects, PIMIS is, of course, a great advance for public finance oversight. Nevertheless, with this revision, the IMF was able to additionally strengthen the institutions that already exist in our system, which could help reduce financial risk and improve the transparency of public finances. These are institutions such as the State Audit Institution, the Agency for the Prevention of Corruption, the Council for the Fight against Corruption and the Fiscal Council.

Apart from the Fiscal Council, which was conceived as a public policy analysis body, these bodies have not dealt with budget projects for a long time. Although budget projects are getting bigger and more complex, their powers are not expanding. Although the budget of the Republic of Serbia has doubled since 2016, only the budget of the State Audit Institution followed this increase to the same extent. The budgets of the other mentioned institutions grew less, and some remained at the same level as in 2016. The agreement with the IMF lasts until the end of this year and will probably have another revision. Perhaps it is an opportunity to further improve the risk of public finance management by increasing the budget of these institutions and expanding the powers that enable them to supervise large budget projects.

The author is a professor at the FPN in Belgrade