The Reputation Of The Monetary Authorities

The recent statement by National Bank of Yugoslavia (NBJ) Governor Dragoslav Avramovic that the NBJ will impose a restrictive monetary policy in the coming period and that it will intervene with federal foreign currency reserves on the hard currency market had an almost immediate effect: overall inflation stopped and the black market exchange rates, according to always unreliable grey market figures, dropped by over 20% on Monday. All that shows that Avramovic and the central monetary authorities enjoy a good reputation.

Once again, it's turned out that the value of the local currency is very sensitive to expectations, especially if they are backed up by monetary policy steps. But it's an illusion to think that promises are enough for a stable currency. Reality is always much more convincing than promises, even when they come from highly reliable economic experts. There would have been no expectation of inflation in the first weeks of October if they hadn't relied upon rumors of the beginning of an investment cycle, higher incomes, etc. and if those stories had not been backed up by a real emission of money and bank credit policies.

The Governor's statement showed that the monetary stage of the economic recovery program is not behind us, that monetary problems are not even remotely solved. On the contrary, it showed that they have to be a cause for constant concern and draw the attention of the monetary authorities.

A feeling of mistrust of the monetary authorities by businessmen is frequently voiced. The reanimation of the currency (FebruaryJuly 1994) proved that the moderate and wise monetary policy was paying dividends quickly and restoring trust in the currency. The destroyed banking system would probably recover quickly if it could find the strength to meet its financial obligations to the savers that it let down.

The Governor's statement and calming of market prices also showed how useful it is when the monetary authorities deal only with monetary issues and policies and don't get involved in setting salaries, pensions, taxes or in investment activities. It also showed that a healthy dinar is the basic condition needed to revive production and that any instability results in unbelievably quick economic chaos.

In September and October of 1993, when we were working on studies which were the basis of the monetary reconstruction program, we dreamed of a Governor like this, one who would be free of the influence of the center of political power and independent in conducting monetary policy. At the time, even lowranking political figures allowed themselves the luxury of demanding that the monetary authorities create funds for this and that, most often for shady ideas on reviving production based on credit injections.

We didn't even dream that the pendulum of economic and political power could swing and that soon the monetary authorities would want to deal with the levels of salaries, pensions and taxes; or that they would want to directly influence investment and development decisions. The Governor's latest moves show that those ambitions have been suppressed and brought down to reasonable levels. The question of setting income levels and development have been left to the Governor's working groups. Their main goal is to achieve the necessary consensus between trade unions, the state, economic chambers, banks and science. The Governor was right when he assessed that that consensus is extremely important and useful to further economic recovery.

That consensus will also allow the dinar to resist pressure. Perhaps many trade union officials aren't aware that their wish to prop up the healthy dinar clashes with their wish to see not a single worker laid off as long as the economic blockade is in place and to have salaries that are high enough to secure living standards which are justified as social principles but frequently have no justification in company incomes.

I am convinced that the Governor will keep his promises, i.e. that he will suppress inflation through monetary policy. Everyone involved in the economy will help him wholeheartedly. The dangers can certainly be avoided, but only if they're faced bravely and with eyes open. The lull caused by the results achieved so far and refusal to see obvious upsets (price hikes, exchange rate changes) are a disservice to the defence of this program which is vital to the country's economy.

The program does have alternatives, albeit bleak ones.