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October 3, 1994
. Vreme News Digest Agency No 158
The Economy

Black September

by Dimitrije Boarov

The official foreign currency rate of the dinar has been halved. Bosnian Serb leader Radovan Karadzic's dealers certainly gave a helping hand to its fall. The peasants who now receive some cash for their wheat also helped. But the basic reason is that the dinar is being grounded by the inability of a paralyzed economy to expand.

The increase in economic activity and the fall of the dinar's foreign currency rate after the first signals that Serbian President Slobodan Milosevic's ``new Bosnian policy'' would launch the ``process of an easing of sanctions'' has only taken the lid off of a number of problems which the Yugoslav economy will face upon returning to the world market. An outdated economic system and anachronistic industries are supposed to return to the world 2,000 days before the year 2000. The first result of a moribund economy's attempt at a ``comeback into the international community'' was the ``return of inflation.''

The first attempt at pumping some oxygen into Yugoslavia's creaking economy showed that the ``healthy dinar'' could not survive the cure. After production got into full swing in August (an 8% growth rate), September saw a large drop in the value of the dinar on the black market, so that 1 DEM now costs 1.5 dinars.

A wave of price increases ensued, so that only a Prime Minister of Radoje Kontic's cool could have added up September's weekly price rises (0.9% the first week, 0.5% the second week, and 0.4% the third week) and have come up with an inflation rate of only 0.3% for the entire month. Kontic informed the Chamber of Republics of the Yugoslav Assembly of his mathematical discovery on September 28, thus throwing new light on the official statistic that prices in Yugoslavia have increased by only 3% since the introduction of Yugoslav National Bank Governor (NBJ) Dragoslav Avramovic's program of monetary reconstruction (launched January 24) to the present day.

The director of the Serbian Statistical Office, Milovan Zivkovic, informed newsmen recently (September 23) that services had gone up by 44.2% in the last three weeks, and financial services by as much as 62.6%. Zivkovic mentioned that the price of agricultural products had gone up by 17.8% since Avramovic's program began, which for Yugoslav citizens puts the general assessment on the ``stability of prices'' in a different light. If ``statistical maneuvering'' could stop inflationary forecasts, then PM Kontic could be forgiven. The employed will not easily forgive him or Serbian PM Mirko Marjanovic even the most cautious fiddling of wage statistics, which they are doing in order to avoid having to explain the real reasons for the horrific pauperization of Yugoslav citizens during the realization of ``historical goals'' in the past two years.

What is the significance of the much-quoted fact that salaries increased by eight times since January? Why is there no mention that the ``state's monthly salary'' jumped from 17 million dinars in January to nearly 600 million in August when mentioning the fact that salaries went up from 30 dinars to over 200 dinars? While citizens received wage increases over eight months public expenses increased by 35 times. Tomislav Z. Nikolic, who carried out this statistical game based on Serbian data (in the Novi Sad-based weekly ``Nezavisni''), says: ``And let somebody now say that Avramovic's program was adopted in the interests of the people...'') Of course, of the sum of over four billion dinars (Deutschemarks) which the state collected in eight months, a large part is earmarked for the salaries of state officials, policemen and the army. Unfortunately, the economy cannot cover all of these expenses with a level of production 65% below that of 1989. Once more than 50% of the state product was earmarked for wages; PM Kontic complains that the figure has now reached 30% and that it is too high.

Avramovic is aware that salaries are low and on several occasions spoke against the risky operation of inflating salaries so that they might stimulate demand and so launch production. This has earned him the ire of most economic experts, including those from the so called team of experts. Danijel Cvjeticanin keeps reminding the Governor, the state, and the employed that the printing of more money in order to increase production, above a monetary balance, in fact leads to a decrease in production. ``When in a situation such as this someone promises citizens salary increases, then they are glossing over the fact that they will in fact be decreased, because a greater amount of dinars will then buy a smaller amount of more expensive goods,'' said Cvjeticanin in the Belgrade daily ``Borba'' and cautioned that it was necessary ``to turn off all verbal taps.''

The popular Governor is at odds with the majority of Yugoslav economists. After barbs addressed to his critics at the Institute of Economic Sciences and CES Mekon, a rift has appeared in his relations with the Economic Institute and the entire team with which he started the monetary reconstruction. Oskar Kovac criticized Avramovic in a CES Mekon analysis for overestimating the value of the dinar in the beginning. Avramovic caustically replied that Kovac had been the co-author of numerous unsuccessful reform attempts. The ``quarrel'' with Kovac is interesting because it concerns an economist close to the ruling party. Others fared worse in a telephone interview with TV Belgrade. Speaking from Geneva last weekend, Avramovic practically proclaimed them dissidents. The very touchy Governor expects to be elected to the Academy of Arts and Sciences on October 20 at the suggestion of Kosta Mihajlovic, and seems to have forgotten the famous definition of an economist given in 1976 by the British magazine ``New Statesman'': ``An economist is a harmless academic servant whose theories and laws are nothing more than a wisp of wind compared to the anarchy of banditry, greed and corruption which rule the financial activities of the real world.'' It is difficult to assess if Governor Avramovic really foresees ``banditry, greed and corruption'' when he promises ``workers' collectives'' credit directly from the NBJ, or has he overestimated his role? There is talk that he has stepped on toes in Serbian PM Mirko Marjanovic's government. The government is grumbling because Avramovic promised the peasants 700 million dinars, shoe-makers 140 million dinars, glass-makers 40 million dinars, and so on. At the same time, it is not clear if they are grumbling because they fear the future of financial stability or because decision making on the division of the booty is being taken out of their hands. According to the latest available data (late August), of the approved two billion dinars in credit, the NBJ approved over 500 million dinars. The majority of the NBJ's loans to direct users were long-term, so that the NBJ has become the biggest investment bank in the country (nearly 65% of the long-term credits were signed by Avramovic). On the other hand, according to data given by PM Kontic, the NBJ's money mass has reached 2.2 billion dinars and is expected to increase to 2.5 billion dinars by the end of the year. If this sum of dinars is linked to a statement by the new NBJ vice-governor Ljubisa Krgovic regarding the current sum of 530 million DEM in foreign currency reserves, then it is easy to conclude that the first phase of Avramovic's program with the dinar fully covered has ended.

September's inflationary ``jitters'' on the market were caused by the meeting with Milosevic at which, precisely because of dissatisfaction over a monetary balance in conditions of low production levels and a low standard of living, a two-year program on ``Economic development, social justice and the financial efficiency of the economy,'' was adopted. This phenomenon is a throwback to the time when former prime ministers Radoman Bozovic and Nikola Sainovic announced ``programs of measures'' in which the economy expressed its belief and trust before they had even been adopted---by a rise in prices, salaries, consumption...

It is a well-known fact that in Yugoslavia's recent economic history September has always been ``Black September.'' September 1989, on the eve of PM Ante Markovic's address to the Yugoslav Assembly, after an average monthly inflation rate of 15%, is a case in point. Prices in September increased by 48%. Or further back, when Branko Mikulic was Prime Minister and his ``May program with three anchors'' caused salaries to be frozen in September, thus creating conditions for the ``anti-bureaucratic revolution.'' All programs adopted around year's end or during spring were usually hobbling by autumn because no single government managed to keep up the tempo of ``system changes'' or ``fiscal adaptation.'' For the time being, Radoje Kontic's government promises to do so.

The panic which resulted after the appearance of symptoms heralding the return of inflation shook the very upper echelons of this government. This has been confirmed by a ``letter of instructions'' to the state media to stop all ``criticism and challenging'' of Avramovic's program. The fact that the state leadership fears inflation could prove to be a blessing in disguise, since they will do their best to curb it. A healthy dinar is possible because of the fact that the world capitals which now hold the fate of Milosevic's Yugoslavia in their hands might not allow it to be swept away by a hyperinflationary tide.

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