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By Gordana Filipovic and Adam Tanner
BELGRADE, March 31 (Reuters) - Serbia's central bank urged the government on Tuesday to announce a clear plan to cut 2009 spending and avoid delays in a three billion euro IMF loan deal after data showed industrial output and trade plunging.
Officials in Serbia and elsewhere in the Balkans had hoped that relatively low exposure to the international finance sector would shield them from the world slowdown. Yet the economic news from the region has continued to worsen in recent weeks.
The economy still grew by 5.4 percent in 2008, compared with the originally forecast 6.1 percent growth, but an almost 20 percent plunge in industrial output in February to early 2005 levels raised concern that the 2009 recession could be worse than expected.
A 20 percent fall in tax collection in February could emerge as the key concern, a government source said, as the government needs to cut spending by one billion euros, leaving the nation with a billion euro fiscal gap -- equivalent to three percent of GDP.
"It took a while before Serbian politicians really woke up to the fact that this could hit Serbia hard," said Hans Ola Urstad, head of the Serbian mission of the Organization for Security and Co-operation in Europe.
"They may have been a bit too optimistic in the beginning, but that is not different from other places."
The February industrial output fall, for the third consecutive month, was mainly driven by weaker manufacturing, mining and energy, the statistics bureau said.
"With this sharp February decline, the recession will be a lot worse," said Pavle Petrovic, chief macro economist at the FREN economic think-tank. "But the government can't do much in a situation like this. The decline reflects a sharp contraction in demand, both domestic and foreign."
After becoming an international pariah during the wars of the 1990s, the Serbian government had set its sights on steady economic growth and one day joining the European Union.
"It comes at an extremely inconvenient time for Serbia," said Urstad, who noted Serbia had eight years of solid growth.
SPENDING CUTS
The government was due to meet later on Tuesday to discuss new ideas for savings. Serbia has agreed with the IMF to cut its fiscal gap by half, partially through a 6 percent income tax surcharge, in response to an estimated 2 percent economic contraction in 2009 and in exchange for a 3 billion euro loan.
The plan was announced to an unusually hostile press reception and prompted public outcry and union threats of protests, forcing the government to rethink where to seek cuts.
"I sincerely hope that (the cuts) will be agreed by the end of this week or next, at the latest, so that the IMF board can approve the three billion euro loan by early May," central bank governor Radovan Jelasic was quoted as saying.
A senior government source said there was little the cabinet of pro-Western parties and the Socialists of late autocrat Slobodan Milosevic could do to make the plan anti-recessionary.
"One thing is clear -- there is 100 billion dinars worth of savings we have to make," the source said. "The IMF does not really care where the savings come from as long as they do not affect macroeconomic stability."
"You can cut spending or raise taxes," the source added. "The big concern is ... a clear lack of export demand and a halt in foreign credits."
The latest negative economic data came on a day Serbia opened its largest indoor mall in Belgrade, a 150-million euro investment. Crowds lined up to be the first into the complex across the river from the city's historic centre but many were hunting for opening-day bargains.
Retail business, along with financial services, transport and telecommunications, has led Serbia's economic growth for years. But January statistics show a five percent retail fall. (Editing by Andy Bruce/Ruth Pitchford)