Serb central bank governor quits, government under fire

BELGRADE (Reuters) - The governor of Serbia's central bank resigned on Thursday, accusing the Balkan country's new Socialist-led government of threatening the bank's independence with a draft law that has drawn fire from the European Union and the IMF.

Dejan Soskic quit as lawmakers debated draft legislation that the government argues will improve oversight of the bank but which the EU says will mark a "step back" for the former Yugoslav republic's bid to join the bloc.

Soskic said he hoped his resignation would prompt the government to rethink what he called a "poor law that would have severe consequences for the financial stability and credibility of the state".

After Soskic stood down, the central bank released a letter from the International Monetary Fund in which the lender warned the law would mark a "major weakening" of the bank's autonomy.

The Fund said proposals to let the bank buy securities issued by the government or other public entities on the secondary market "allows, de facto, indirect monetary financing of the public sector, which would pose serious risks for the foreign exchange reserves of the NBS (National Bank of Serbia) and the exchange rate".

Prime Minister Ivica Dacic's ruling coalition took power last week, inheriting an economy that is sliding into recession, rapidly rising debt, and a jobless rate of 25 percent.

Accusing Soskic of negligence, Dacic says the central bank needs closer supervision and should work in greater accordance with the government as the latter pursues more expansive fiscal policies aimed at promoting growth.

"The aim is to place the National Bank of Serbia in the service of what Prime Minister Ivica Dacic said in his policy statement: the stimulation of business activity and rise in living standards and material wealth of the citizens," said nationalist lawmaker Milenko Dzeletovic of the ruling coalition.

EU: "DEEP CONCERNS"

The EU, which made Serbia an official candidate for membership in March, said in a statement late on Wednesday that the draft amendments "raise deep concerns as they are likely to jeopardise the principle of independence of the National Bank".

The bloc is watching the government's first steps closely, concerned by the return of a political alliance that was last in power under the late Serb strongman Slobodan Milosevic in the 1990s, when Serbia was mired in war and largely isolated.

Dacic, Milosevic's wartime spokesman, says he wants Serbia to join the EU, but Western diplomats admit doubts over whether his government is willing or able to pursue the difficult political and economic reforms it will take, particularly at a time of economic hardship.

Soskic has kept monetary policy restrictive despite an increasingly bleak economic outlook, putting him at odds with the new government. Serbia has the highest official interest rates in central and eastern Europe, at 10.25 percent.

Adoption of the law would set a 90-day deadline for the appointment of a new bank leadership.

In quitting, Soskic becomes the fourth governor to be forced out before the end of his six-year term since Milosevic's departure from power in 2000.

In emailed comments to Reuters, the deputy head of the EU delegation to Serbia, Adriano Martins, said the European Commission, the EU's executive arm, had not been consulted on the amendments, and cautioned:

"The adoption of these amendments would be a considerable step back in the alignment of Serbia's legislation and principles with the European Union."

The law could hurt Serbia's plan to return to the IMF for a new loan deal, after the lender froze a 1 billion euro (793.59 million pounds) standby agreement in February over rising debt.

Serbia's budget deficit stands at over 7 percent of output. Public debt is almost 55 percent, far higher than levels recommended for similar emerging economies by the IMF.

The absence of IMF backing, and weeks of political uncertainty after a May election, have driven the Serbian dinar to record lows against the euro this year.

(Writing by Matt Robinson; Editing by Catherine Evans)