(Adds IMF Jaeger quotes to Reuters, more detail, reaction)
By Gordana Filipovic
BELGRADE, March 26 (Reuters) - The International Monetary Fund and Serbia said on Wednesday they had agreed a 3 billion euro ($4.07 billion) loan through April 2011 to back the Balkan nation in enforcing the biggest spending cuts in years.
The 27-month programme, designed to anchor its weakening economy, replaces a $520 million loan approved in January and puts the country close to the ranks of EU neighbours Hungary and Romania and non-EU member Ukraine, who have landed multi-billion euro bailout packages to save them from financial meltdown.
Under the programme, expected to be approved by the IMF in early May with the first tranche disbursed in the same month, Serbia has committed to 1.0 billion euros worth of spending cuts, equivalent to three percent of GDP.
IMF chief of mission Albert Jaeger said fiscal adjustment was the key to Serbia's stability as growth turns negative.
"Serbia's GDP will almost certainly decline in 2009 ... It looks more likely to be minus two percent. And we believe that growth in 2010 will be flat," Jaeger told a news conference, adding that the outlook was pretty much a regional trend.
"A few months ago we expected a very sharp downturn in 2009 and then recovery in 2010," he told Reuters. "Everybody has moved to a pattern where there is downturn in 2009, very little recovery in 2010 and the recovery is now backloaded to 2011."
Independent analysts see Serbia's GDP contracting by up to 5 percent in 2009, following years of average 6.7 percent growth.
"It will be difficult to implement this ambitious fiscal adjustment package, but we don't think there is a way around it and the authorities agree," Jaeger said.
TAXATION
The government will revise down its 2009 budget in the next few weeks and the state administration is expected to bear the brunt of fiscal adjustment, Prime Minister Mirko Cvetkovic said. "The government will lead the cost cutting by its own example, "Cvetkovic told a separate news conference.
The cabinet will impose a new hire ban, restrict the use of mobile phones and cars, and freeze wages and pensions through 2010. A 250 million euro revenue boost in 2009 will come from a six percent surcharge on all wages and pensions above 130 euros.
New taxes will be slapped on residential property bigger than 60 square metres, luxury cars and income from dividends.
The higher tax burden would stay in place "until the crisis was over" or "as long as fiscal revenues underperformed".
"The whole world is fighting recession through fiscal relaxation, and Serbia will raise taxes," Stojan Stamenkovic, one of Prime Minister's economic advisers, told Reuters.
But the deepening impact of the worst global economic crisis in decades could mean more spending adjustments in Serbia.
"There are still downside risks in the economy and there may be further adjustments needed going forward if the economy turns weaker in the future than we expected," Jaeger said.
As part of the deal, Serbia is expected to end 2009 with a fiscal gap of 3.0 percent of GDP, or one billion euros, a level the IMF considers the maximum it could finance.
CREDIT SUPPORT
"This is the most significant and the biggest fiscal adjustment since reforms started. It is equivalent to eight percent of consolidated budget," central bank governor Radovan Jelasic told a news conference.
He said most measures were non-inflationary, though the end-2009 inflation target could be moved up to 8-12 percent, from the original 6-10 percent band. Monetary policy will be the same and the dinar will stay under the managed float regime.
To ensure external and internal liquidity, the IMF will back Serbia's calls on creditors to roll over around 5 billion euros worth of private sector's debt maturing in 2009, Jaeger said.
"We are looking for some commitments that these banks broadly maintain exposure to Serbia and make sure that their subsidiaries remain well capitalized," Jaeger said, ahead of the meeting with creditors in Vienna on Friday.
The IMF was also helping the central bank prepare new dinar and hard currency liquidity facilities as part of a financial sector support plan, but the size of the facility and exact terms had yet to be worked out in the next 4-6 weeks, he said. (Editing by Toby Chopra)