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Serbia’s economic growth will slow more than earlier forecast as the global financial crisis cripples the banking industry and investment shrinks, central bank Governor Radovan Jelasic said.

Gross domestic product may expand 5.5 percent this year, compared with the bank’s initial estimate of 7.5 percent, Jelasic said in an interview in Belgrade. The economy grew 6.4 percent in 2007, when investments helped raise living standards and wages.

Serbia is fighting the effects of a worldwide credit squeeze that has pushed emerging markets lower. It secured a $516 million standby loan on Nov. 14 from the International Monetary Fund, the fourth eastern European nation to tap the institution for funds. The IMF sees 2009 growth of 3 percent and Jelasic said the first quarter “will be challenging.”

“Let’s be fair and admit that most of the growth originated in non-trade sectors, from financial services to transport,” Jelasic said yesterday. “I expect these sectors will be dropping now.”

The dinar fell as much as 1.6 percent to the weakest since the introduction of the euro, after his comments.

Serbia’s slowdown comes at a time when the economy is still recovering from the devastating Balkan wars and international isolation in the 1990s. To counter the effect of the worldwide credit crunch, the Narodna Banka Srbije will ease some banking rules this month to improve liquidity and help support the industry during the economic slowdown.

‘Depressed’ Prices

For the past two months, Serbia’s banking industry has been experiencing a decline in deposits. Hungarian lender OTP Bank Nyrt. canceled a plan to sell its Serbian unit because of “extremely depressed” market prices.

Jelasic also said the inflation rate this year will dip below 10 percent, compared with 10.4 percent in November and 15.9 percent in June, because of falling crude oil prices.

“This does not mean we are happy because without lower crude oil prices the figure would be much higher,” he said.

The core inflation rate at the end of this year will be 10 payday loan online.9 percent, instead of a previous target of 8.7 percent, the central bank said on Nov. 18.

To combat inflation, the central bank in October boosted its repurchase benchmark rate to 17.75 percent, the second highest in Europe. Jelasic said the “future of the repo rate” will depend on the budget and a meeting with the IMF’s board of directors scheduled for Dec. 19.

Supporting the Dinar

The central bank for the past two months has spent as much as 500 million euros ($637 million) to maintain liquidity in the currency market. The institution’s key problem is “drastic” drop in trading on the currency market.

“The dinar is in shallow waters, and the key reason for that is the mistrust of foreign investors,” he said.

The dinar fell to as low as 92.1585 today and was trading at 91.9160 per euro at 10:16 a.m. in Belgrade.

The bank yesterday sold 10 million euros to stabilize the dinar. The dinar declined 12 percent this year as the country struggles to attract funds to finance its $6.2 billion current- account deficit. In October, the central bank lowered compulsory reserves for commercial banks.

The IMF warned that government overspending may push the current-account deficit this year above 18 percent of GDP, which it must cover through increased borrowing.

Prime Minister Mirko Cvetkovic’s government promised to cut the budget gap to 1.5 percent of GDP from 2.7 percent of GDP to help weather the global crisis and attract investors. Budget revenue has been set at 715 billion dinars ($10 billion) and spending 761.5 billion dinars.

Jelasic said lowering minimum reserves, narrowing the budget deficit and complying with IMF recommendations may help strengthen the dinar.

“We can’t foresee the exact timing for that to happen,” Jelasic said.

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