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Serb central bank governor quits, govt faces EU/IMF ire

By Aleksandar Vasovic and Matt Robinson

BELGRADE (Reuters) - Serbia's central bank governor resigned on Thursday over an attempt by the country's new Socialist-led government to tighten its control of the bank in the face of stiff criticism from the European Union and the International Monetary Fund.

Dejan Soskic quit in the middle of a heated parliamentary debate over a draft law 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".

The law has emerged as the first major test of the government's commitment to the economic and political reforms sought by the EU.

After Soskic stood down, the National Bank of Serbia (NBS) released a letter from the IMF in which the lender warned the law would mark a "major weakening" of the bank's autonomy.

The Fund said plans 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 and the exchange rate".

The coalition took power last week, marking the return of a political alliance that was last in government under the late Serb strongman Slobodan Milosevic in the 1990s, when Serbia was mired in war and hyperinflation.

It has inherited an economy that is sliding into recession, rapidly rising debt levels, and a jobless rate of 25 percent.

Accusing Soskic of negligence, Socialist Prime Minister Ivica Dacic says the central bank needs closer supervision and should work in accordance with the government as the latter pursues more expansive fiscal policies to promote growth.

"The aim is to place the National Bank of Serbia in the service of what ... 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, a member 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".

Dacic, Milosevic's wartime spokesman, says he wants Serbia to join the EU, but Western diplomats admit doubts over whether he is willing or able to pursue the reforms it will take.

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 new leadership for the bank.

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 IMF warned of "considerable implications" for Serbia's macroeconomic stability and its 1 billion euro (793.03 million pounds) loan program, which the Fund froze in February over rising debt but which the government says it wants to renegotiate.

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.

"Financial markets never look with benevolence on changes at the top of a monetary authority and this will inevitably lead to an increase of risk premiums," said Djordje Djukic, an economy lecturer and former member of the central bank council.

"Investors will now remain cautious until they see not what kind of monetary policy will be announced, but what kind of monetary policy will materialise."

(Writing by Matt Robinson; Editing by Catherine Evans and Andrew Osborn)

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