* Cbank now sees GDP shrinking 1.5 pct - vice governor
* Expects rebound with 3 percent growth in 2013
* Sees inflation soaring to 12 percent this year
(Adds details)
BELGRADE, Oct 10 (Reuters) - Serbia's ailing economy willshrink faster than previously thought this year, weighed down bypoor harvests caused by a long drought, the vice governor of itscentral bank said on Wednesday.
Gross domestic product would decline by 1.5 percent ratherthan the 0.5 percent drop the bank had been forecasting, VeselinPjescic told a news conference.
It would then bounce back with growth of 3 percent in 2013,driven by rising exports and investments.
As well as trying to fend off the spillover from the eurozone debt crisis, the economy is struggling against a domesticbackdrop of soaring public debt, high inflation and unemploymentand a weak dinar currency.
That combination prompted the central bank to raisebenchmark interest rates, already the region's highest, by 25basis points to 10.75 percent on Tuesday.
Pjescic said inflation would soar to 12 percent this year,fuelled by the poor harvest as well as a government decision tonarrow the 2012 budget gap via a rise in value-added tax.
Inflation, which stood at 7.9 percent in August, wouldcontinue to rise until the first half of 2013, when it wouldbegin to drop to within the bank's target band of four percent,give or take 1.5 percentage points.
The economic recovery next year will be underpinned byhigher production of Fiat 500L compact cars in a 1billion euro ($1.29 billion) joint venture between the Italiancarmaker and the government, Pjescic said.
Serbia is also burdened by a 28 percent unemployment rateand the Socialists/nationalist government has increased itsborrowing to finance its deficit and tame rising socialdiscontent.
Last month it issued a $1 billion Eurobond and hopes for a$1 billion loan from Russia, planned for this year and next. Thecountry also wants a new stand-by loan deal with theInternational Monetary Fund to reassure investors.
Earlier this month the IMF forecast Serbia's economy wouldcontract by 0.5 percent this year and grow 2 percent in 2013.
The fund froze a 1-billion euro ($1.3 billion) loan dealwith Belgrade in February over broken spending promises and lastmonth told the government to restore the autonomy of the centralbank and rein in spending as conditions for new loan talks.
Pjescic said tight monetary policy had helped the dinar
recover against the euro since mid-September, as hada programme of government-subsidised loans to exporters.
The dinar has been trading at an average of 115 per eurosince mid-September against 117.5 before then.
($1 = 0.7711 euros)
(Reporting by Aleksandar Vasovic; Editing by John Stonestreet)
((aleksandar.vasovic@thomsonreuters.com)(+381113044930))
Keywords: SERBIA CBANK/