The COVID-19 pandemic caused an economic shock for the Serbian economy. This economic shock is specific because it is both external and internal and influences both offer and demand. It is necessary to fully understand the nature of this shock in order to react with an adequate economic policy. Starting from the most likely scenario, the economic tremors caused by COVID-19 are exceptionally strong and temporary. When it comes to the field of fiscal policy, the current crisis commands it to be expansionary, i.e. allowing for a larger fiscal deficit, primarily as the result of targeted efforts to disburden the economy and consequently lower public revenues. It should be noted that, in the existing conditions, the aggravation of the fiscal position ensues even without expansionary fiscal policy measures. The lack of state support would additionally strengthen the existing negative economic trends and the activity would slow down even more than necessary.
 
When devising anti-crisis economic policy and set of measures, it is necessary to comply with the proper principles:

    1. The measures need to be linear and universal. Exemption of specific sectors and enterprises (companies) is not justified, bearing in mind the fact that the crisis has already spread throughout all parts of the private sector, that negative expansion is expected to continue and that the scope and potential of prospective measures narrow down if special position is envisaged for certain sectors and enterprises (companies). The sector of entrepreneurs subject to lump-sum taxation is an exception.

    2. The measures need to be well-weighed – on the one hand, they need to bring a noticeable relief to the economy and, on the other, not to lead to large deficits and stir macroeconomic imbalances. Bearing that in mind, fiscal measures need to be dominant, while there should be no experimenting with unconventional solutions or introducing radical changes in the monetary field.

    3. The nature of crisis is such that systemic changes, such as permanent changes in tax architecture, are not suitable. Instead, intervention measures which can easily be annulled after the negative effects have worn off In this connection, the need for additional fiscal stimulus should be noted with the aim of preventing new structural disturbances caused by this crisis and avoiding long-term economic consequences.

    4. In addition to coordinating key measures of fiscal and monetary policy, it is necessary to ensure appropriate amendments to the regulatory framework and monitoring in order to maintain in practice the balance between financial stability, healthy banking system and efforts to retain the necessary level of economic activities.

    5. The measures must be defined until the end of March this year, and come into effect on 01 April 2020. The beginning of implementation of the measures aimed at increasing the liquidity of economy requires more time, bearing in mind that the realization of such measures would have to begin until the end of April 2020.
 

FISCAL POLICY INTERVENTION MEASURES
 
a) The key link in the chain that must remain unbroken are jobs in enterprises in the private sector. That would provide a strong stimulus to the survival of enterprises and activation thereof after the crisis is over. For that purpose, specific measures that need to be implemented in the period of at least three months, with the possibility of extending that period, would be the following:

 
b) Payment of profit tax and property tax needs to be suspended for the period of at least three months. After this period has ended, profit tax to be paid should amount to 50% of the calculated amount for 2020. Payment of property tax for the second quarter of this year will be realized through aliquot installments in the period of two years, starting from January 2021. The funds lacking in the budget of local self-governments for 2020 would be covered by increased transfers from the budget of the Republic of Serbia (50%) and by reducing other appropriations within the budget of local self-governments (50%). It goes without saying that non-productive capital expenditures first need to be reduced.
 
c) Payment of lump-sum tax needs to be suspended in the period of at least three months, which would alleviate the position of entrepreneurs.
 
d) Calculation of interest on due tax liabilities needs to be suspended in the period of at least three months.
 
e) Payment of parafiscal charges (communal tax on business signs, membership fees, environmental fees, etc.) needs to be suspended in the period of at least three months.
 
f)  After the state of emergency has ended, reduction of profit tax from 15% to 10% should be considered. This measure is effective in raising the positive expectations of successful businessmen.
 
 
As regards budgetary expenditures:
 
a) It is necessary to implement the planned budgetary expenditures for pensions and public investments. The possibility to moderately reduce salaries in the public sector should not be excluded should the crisis last more than a couple of months.
 
b) It is necessary to delay investment projects that make a modest contribution to economic growth and reallocate those funds in order to finance measures within the anti-crisis program.
 
c) It is necessary to reexamine the planned expenditures and reduce them in all positions of public procurements which are not related to healthcare, social and economic protection measures in the time of crisis. It is also necessary to increase expenses for healthcare and social protection.
 
 
GUARANTEE FUND FOR INCREASING THE LIQUIDITY OF ECONOMY
 
In addition to the described fiscal policy intervention measures, it is necessary to define a set of measures that would encourage a dramatic increase in the liquidity of economy and that would need to be implemented at an unparalleled pace. Namely, bearing in mind a very low level of liquidity reserves in the economy, especially in the segment of micro, small and medium-sized enterprises, as well as a significantly reduced inflow in the short term, enterprises will very soon be faced with a lack of money to cover the basic costs. That is why it is necessary to urgently establish a Guarantee Fund that would guarantee for loans granted to enterprises by commercial banks, thus pumping in the necessary new liquidity into the system. A similar set of measures has already been defined in many countries and, depending on the macroeconomic circumstances in individual countries, it amounts to between 3% and 15% of GDP. It is our estimation that two key preconditions for successful operation of the Guarantee Fund have been met: adequate liquidity of the banking sector and fiscal ability of the state to issue guarantees.
 
The first precondition for the successful implementation of this model is adequate, high liquidity of the banking sector. The National Bank of Serbia has already been, gradually and systematically, using the mechanisms dedicated to additional increasing of banks’ liquidity. In the upcoming period, depending on the escalation of the crisis, adequate reaction should be expected through implementation of other measures aimed at increasing the liquidity of the banking sector. Thanks to strict financial regulation, this flexible approach employed by the National Bank of Serbia toward banks does not threaten the financial stability. Furthermore, bearing in mind high foreign exchange reserves, by intervening at the foreign exchange market the state will be able to guarantee for the stability of the foreign exchange rate with minimum oscillations, thus eliminating the pressure on prices.
 
The second precondition is the fiscal ability of the state to issue guarantees for liquidity loans. Through implementation of a responsible fiscal policy, the public debt has been significantly reduced (to around 50% of GDP), which is why it can be noted that there is enough fiscal space. In order to roughly estimate the need for liquidity, thus estimating the amount of funds in the guarantee fund, it is necessary to analyze the scope and structure of the newly granted loans in the last quarter of 2019, adhering to the principle that the newly granted loans represent the economic demand for credit facilities in normal conditions.
 
We recommend several key elements necessary for the launching of the Guarantee Fund:
 
a) The liquidity should be directed toward micro, small and medium-sized enterprises, regardless of which economic branch they belong to, as well as toward big enterprises directly affected by the current crisis. It is very important for loans to also be available to enterprises which are not indebted currently, because, among other things, they do not benefit from the already implemented “moratorium” measure.
 
b) In order to avoid moral hazard, the decision on the distribution of credit lines is made by the management of commercial banks, and, applying nondiscriminatory criteria, credit lines are directed toward clients that had been reliable payers until the beginning of the current crisis.
 
c) The state would issue guarantees in the amount of 80% of the loan, while bank would take over the rest of the risk.
 
d) Credit criteria should be as simple as possible for the purpose of prompt approval and disbursement of loans in line with the minimum acceptable criteria that would be uniform for all banks, those being the following: the client’s account had not been blocked before the state of emergency was declared, the client regularly performed their obligations to banks and the state, certain standard criteria (financial ratios) need to be met, etc. It is our proposition that liquidity loans be granted for the period of 36 months on average, with the grace period of 12 months. This is the right measure, bearing in mind the currently known projections and the expected echo effect of the crisis on the economy.
 
e) The enterprises would have to commit to not reducing the number of employees in the period of at least 6 months, as well as to regularly disbursing salaries and taxes and paying their suppliers.
 
In addition to the abovementioned interventions aimed at increasing the liquidity of the economic system, we are of the opinion that restoring trust of business entities needs to be considered, because it would lead to unfreezing and reinstating the flow of goods, services and money. A large portion of the sale of goods and services is achieved with a deferred value date, which is why a special guarantee fund directed to issuing accounts receivable insurance to business entities should be established. This measure would dispel the fear of enterprises that their receivables would not be settled, which is why they would be free to maintain the volume of turnover they had before the crisis. The receivables insured in such a way could still serve as a collateral for financing both with banks and in alternative options. The organization that could implement this form of guarantee is the Serbian Export Credit and Insurance Agency (AOFI). One option is to direct this measure toward medium-sized and large enterprises that grant loans to micro and small enterprises.
 
 
CONCLUSION
 
Defining a comprehensive anti-crisis economic program is not a simple task. The Ministry of Finance and National Bank of Serbia must base their decisions on precise calculation of implications of all measures proposed. Those decisions are not easy to make, but it is very important to understand that partial or belated measures or lack of additional measures most certainly lead to general illiquidity of the economy, which would be accompanied by irreversible structural effects in the upcoming period. A coherent and rapidly implemented set of proposed measures would be a driving force behind the liquidity of the economy and would partially dispel the fear of default on payments that created the freezing effect. The state has fiscal space for extraordinary intervention, which is why immediate reaction is necessary. Reserves will dwindle over time, thus reducing the state’s capacity to react and rendering the package of measures aimed at aiding the economy gradually more inefficient. A significant and rapid injection of liquidity is necessary, followed by other measures, of course. Furthermore, complicated bureaucratic procedures need to be avoided, at the same time taking urgency into account. The proposed measures have implications for the increase of the debt and/or reduction of the level of foreign exchange reserves, but not necessarily for the increase of the budget deficit to the full extent. It should be noted that reserves and fiscal space for borrowing are essentially public policy instruments whose main purpose is to ensure that the state intervenes in such extreme situations.