SERBIA – Top officials of Serbia and Montenegro have laid out changes to the countries’ pensions arrangements in a letter to the IMF.

According to the letter – signed by senior government and central bank officials - Serbia would increase contribution rates to the Employee Pension Fund will be increased by 1.4 percentage points to 22%, or three billion dinars.

And transfers to the social funds would be increased by a total of about seven billion dinars – three billion for the Employee Pension Fund, 2.5 billion dinars for the Farmer's Pension Fund, and 1.5 billion dinars for the Labor Market Fund. The transfers would “ensure timely payment of entitlements”.

Montenegro would adopt a pension law that “shifts the indexation of pensions to a weighted average of changes in wages and prices”. The minimum retirement age would be raised by five years “in a phased manner”.

The “Letter of Intent” to the IMF’s then-acting managing director Anne Krueger, was sent in May and has just been made available.

In June the World Bank aapproved a 12 million-dollar credit to support of health and pension system reform and modernisation in Montenegro.

The officials said the moves are part of a wider series of reforms. “Although political developments impacted adversely on the pace of reforms, further progress has been made toward integration with Europe over the past year,” their letter said.

“The two states of the Union of Serbia and Montenegro have moved toward harmonizing their customs, trade and indirect tax regimes as a step toward a Stability and Association Agreement with the EU.” And they said they have made “continued progress” in stabilizing and restructuring the economy.

The IMF said the state pension systems of both Serbia and Montenegro account for about one-third of consolidated public spending, with pension spending as a share of GDP “high by regional standards”.

It said: “Chronic arrears on pension payments and large budgetary transfers to the pension funds in both republics were further evidence that reforms were required to improve pension system financial balance and overall medium-term fiscal sustainability.”

“The key elements of pension reforms were parametric adjustments to retirement ages and indexation rules which would bring immediate fiscal savings relative to the no reform scenario.”

It added that the World Bank’s Social Sector Adjustment Credit system for Serbia “supports the next reforms of the pay-as-you-go system, as well as preparatory steps for a more comprehensive revamping of the pension system”. And it said that a project for improve pension administration is being prepared for Montenegro.

George Coats adds: Serbia’s attraction as an investment target is limited by its political instability. On the international front it lacks a stabilisation and association deal with the EU that would reassure investors that Belgrade was on track for eventual accession. It is linked with a in a union with Montenegro that the Montenegrin leadership wants to end, going as far as to adopt new national symbols earlier this week in a signal that a potentially destabilising rupture is on the cards.

In addition, Belgrade insists that Balkan cockpit Kosovo must remain part of Serbian despite clear signals that the province’s Albanian majority will renew armed conflict to assert their demand for independence.

Domestically, an 18-month vacancy in the presidency ended last month with the election of moderate candidate Boris Tadic, a party colleague of former premier Zoran Djindjic who was assassinated last year, who defeated ultra nationalist Tomislav Nikolic, a supporter of war crimes suspect Vojislav Seselj, who is currently awaiting trial in The Hague.

Tadic’s narrow victory, which followed constitutional changes to overcome voter apathy that had invalidated earlier ballots, indicates that a substantial part of the populace still supports the creation of a ‘Greater Serbia’ encompassing parts of neighbouring Bosnia and Croatia. And economically, Serbia is still suffering from the effects of Milosevic mismanagement.