Policed Exchange Rate

The National Bank of Yugoslavia (NBJ) said on July 18 it was introducing a system to keep track of the exchange of Dinars for foreign currency.

The NBJ statement added that banks said the same people were exchanging Dinars for foreign currency every day which caused the need for a printed form. The NBJ explained that anyone who wants to buy foreign currency will have to say why and list the source of the Dinars. The data will be analyzed by the central bank.

The end of the Dinar's internal convertibility probably could not have been announced more comically since the statement, although signed by NBJ Governor Dragoslav Avramovic, bears all the hallmarks of the old bureaucratic hand of the command economy. Similar statements have been written by the same people for the past 50 years, the people who have been paying dividends to the guardians of the national interest, handing out primary issue loans to state attorneys and directors, selling state reserves for small prices to ministers and their friends, granting import and export permits to veterans of police racketeering. Those same people always saw the ordinary citizen as the opponent and trickster, as the man with the personal interest who endangers the common good which they are allegedly protecting.

It's not by accident that both the program launched by former Yugoslavia's Prime Minister Ante Markovic and the current Avramovic program started out with internal convertibility, at least as a theoretic possibility. The first thing reformers in postsocialist countries with long traditions of administrative money had to do was bridge the gap between the local currency and real money. Every government that lacked credibility in those states had to set the bridge of internal convertibility to get economic policy started since no one trusted their papers. The right given to citizens to exchange their salaries for hard currency gave credibility to the local currency and allowed the state apparatus to conduct some kind of economic policy, get goods back into the shops, stop price hikes and renew production. That happened in all former socialist countries and the Yugoslav leadership finally got around to it last winter. But, those same people who conducted peace, war, sanctions and the policy to lift them, hyperinflation and immediate stabilization, started keeping track of foreign currency exchanges on the bridge intended to link the Dinar with serious hard currency. Seemingly, this was done as a reflex but in fact it's done to keep hold of power.

The introduction of the exchange forms is in fact the final move in a series of police measures aimed at abolishing an illegal foreign currency market which was created to satisfy the demand. The latest decision to make bank customers declare the source of their Dinars follows a number of arrests of people who were selling foreign currency at prices people were prepared to pay.

Imagine a state where you have to declare how you came by the money to buy 100 DM which is the limit for any single foreign currency purchase.

The theory that the NBJ has practically abandoned internal convertibility can be replaced with something more serious: that convertibility was just a theoretic possibility from the start. In truth, Avramovic's promises that the Dinar and the German Mark would be the same and that everyone would be able to choose the money he prefers most never really happened. Commercial banks claimed they never got foreign currency from the NBJ at first, later they said the amounts they got were too small, still later they complained they weren't earning anything on those transactions. It was never easy to exchange Dinars for foreign currency but the theoretic possibility that you could meant that the state was persisting with the concept it had set. Now the free trade concept is being replaced with a policed exchange.

Undoubtedly there were abuses in exchanging Dinars for hard currency but those abuses cannot be dealt with in banks. Recently, Avaramovic said the central bank had bought over 600 million DM since the economic recovery program was introduced with half of that amount being spent on imports. That means someone got 300 million DM at the official rate of exchange leaving the second half open to abuses. That second half could have been bought up with the aim of earning a 15% commission on further sales. There are just two kinds of people in Yugoslavia who have vast amounts of surplus Dinars: smugglers and company directors who have been given cheap bank loans to revive production. Keeping track of smugglers should be done at border crossings not in banks, that's why a customs service exists and that's probably why Mihalj Kertes, once a trusted police informer, heads that service. Why directors prefer to exchange the loans for foreign currency raises even more serious questions: what kind of economy makes production unprofitable and why do businessmen mistrust the longevity of the stable Dinar.

The NBJ decision to keep track of foreign currency exchanges, which practically means an end to the Dinar's internal convertibility, won't contribute to the promised stable exchange rate.

The more so since federal Deputy Prime Minister Nikola Sainovic and NBJ ViceGovernor Nikola Stanic rejected the idea, voiced by many economic experts, on defending the Dinar exchange rate with higher interest rates at a meeting with 200 Serbian company directors on July 18. Faith in the conductors of economic policy is so low and the toll of the sanctions so high that a stable Dinar exchange rate is untenable, possibly not even with high interest rates. Something more radical will have to be introduced either in the way of keeping tight control or in the direction of a free market concept which always has painful social and political results.