A Crossroad

Since January 24, the dinar has among other things survived a one month absence of its creator Prof. Dragoslav Avramovic, which proved to be the greatest danger for the national currency. But, Avramovic's return from the U.S. could not remove all dilemmas and difficulties, and real trials are certainly still to come.

In the past three months, the inflation was curbed with retail prices in March dropping 6.7%. Analysts of the Federal Statistics Bureau recorded a further 0.7% drop in the first week of April, which they contribute mostly to a 5% drop in prices of services. The industrial production rose 12% in February and further 21% in March. Most banks cut their interest rates to nine percent a year. These three elements ended the first stage of the stabilisation programme. The second stage, which began recently, is to boost the production while preserving the trend of stable prices and the dinar's exchange rate.

Competent state bodies say they are more than happy with the programme's effects so far. But there are still some elements that could undermine the results of the economic recovery programme in the long run. Sporadic disturbances on the financial market and unavailability of all foreign currencies in commercial banks are raising doubts that the printing works in Topcider is again working in ``two shifts,'' despite earlier firm promises that not a single uncovered dinar will be printed.

In support to this, some experts say that the monetary frame for the first quarter of this year was exceeded as many as 300 million dinars. These allegations were never denied from the central bank or should we consider as denial a suger-coated statement before the bankers at the Yugoslav Chamber of Commerce that the monetary frame is ``somewhat above'' the planned.

It remains to be seen how Avramovic will react to the explanation by his ``subordinates'' that the money mass should be increased mildly also in the second quarter. Especially if it proves that the credits which were to be used to boost the production were actually used for other purposes. In mid-April, the aggregate sum of such credits stood at 650 million dinars or a half of the overall money mass. With all that money not invested in the production, we will soon feel the first inflatory impulses.

According to initial analyses, credits were used to pay salaries and illegally buy foreign currency on the black market. There are no precise figures as to what extent were the credits misused, but it's clear that in the future credits must be approved under much stricter control mechanisms. Not administrative, but market mechanisms which would imply adequate material consequences for all banks and firms behaving contrary to the programme's orientation. On the other hand, this anticipates clear ownership relations in the economy, which is not the case at present.

The National Bank of Yugoslavia (NBJ) itself grew wary about the misuse of credits and its Council decided to double the compulsory reserves rate. This was to tame, at least temporarily, the banks' excessive credit activities although it would have been better if the central bank had resorted to a subtle instrument to reduce the mass of money in circulation. Some bankers say the NBJ is behaving like an elephant in a China store. They claim that the NBJ's latest decision will drain the funds from profitable firms and allow increased black market profits for all those who are breaking the law and who will most probably not have to abide by the higher rate of compulsory reservers allocations.

But the state, lacking real economic and system measures to eliminate the causes of ``stuetzung,'' resorted to repressive measures. It qualified the foreign exchange trade outside the official market and official rate as a criminal act punishable with up to three years in prison. The same punishment was prescribed for holding any amounts of foreign currency in a place other than bank accounts.

The fate of the dinar will also depend on whether the credit beneficiaries will repay their loans duly and with agreed interests. First repayments are due in several days. The talk about this issue has been avoided because of ``signals'' that the credits cannot be repaid or for some other reason. The real reason might determine the fate of the entire monetary reconstruction programme and the national currency.

It's also uncertain when the long-forgotten old dinar notes will be withdrawn from circulation. A banker told an official gathering recently that large amounts of old dinars can be found on certain accounts. This only adds to the fears that the printing of old dinars never ceased and that old dinars were used to keep some ``privileged'' firms and banks afloat.