An Expert's View: Miroljub Labus on Deficits

Yugoslav National Bank (NBJ) Governor Dragoslav Avramovic promised to stop the primary issue financing of public spending losses on July 24. The promise is simple but its implementation changes a lot of things.

Socialism is not a system that allows an individual to charge at the state and believe he can topple it. Avramovic must count on a counter blow from the state which has several options.

First, the state can insist on keeping a small percentage of the financing of lossmakers even after July 24 counting on the fact that the NBJ prefers to lower primary issue debts instead of doing away with them completely. That would secure that financial channel and could later be used at some politically opportune moment to reinstate the old practice.

The second option is for the state to get as far away as possible from the primary issue and turn to debts in the financial market. For example, Serbia's budget envisages a debt of 290 million Dinars this year. Since no budget income has been realized yet great pressure can be expected to get commercial banks to buy bonds in the second half of the year. Commercial banks won't be able to resist the pressure and they'll direct their loan potential towards the state budget. There won't be any loans left for the economy, trade unions and workers will strike demanding production financing and the banks will exert pressure on the NBJ's primary issue.

In the meantime, the NBJ has set up discount window and began buying discounted, goodsguaranteed, bonds. The conditions governing further bond discounts will have to be eased to satisfy the demand for primary issue cash. That could be the way to avoid a decision on ending the financing of lossmakers. That way is longer and expensive but formally satisfies both sides.

The third option is to break up the consolidated balance of public spending and leave pension and health care funds, on one side, and public enterprises, on the other, to their fate. Those funds and enterprises can't finance themselves. The pension fund plans a debt of 66 million Dinars this year while public enterprises are expected to get 41 million Dinars from the primary issue. Since the electricity companies need 200 million Dinars to rehaul their facilities, the pressure exerted by consumers or pensioners could be more efficient than the influence of the government. That would cause a reopening of the primary issue valve.

The answers to all these questions depend on a number of things including budget limits for the state and for funds and public enterprises.

The question of public spending has to be solved immediately following July 24. Banks do not have the capital to finance the budget while financing public spending from real sources is tenable only if public spending is lowered to the level of available incomes.