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December 12, 1994
. Vreme News Digest Agency No 168
Counter-inflationary Appeal

The Hoarse Optimists

by Dimitrije Boarov

After 10 months of a relatively stable currency and claims of success for the Avramovic monetary reconstruction program, prospects for the Yugoslav economy are growing dimmer and both experts and politicians are losing their optimism. Predictions for 1995 mostly agree that another odd-numbered year is on its way. There is little consolation by the fact that, before the catastrophic odd years 1991 and 1993, 1989 is remembered as a year of truly European standards.

This year, 1994, will also be remembered as the fantastic Avramovic year. But anxiety is spreading as the year is drawing to a close and that, as Federal Prime Minister Radoje Kontic told a December 4-5 meeting of economists, "new solutions and successful adaptation are needed".

This means that the program will be abandoned through consistent implementation.

The need to abandon the program was best articulated by Dragutin Marsenic, who told the economists' gathering that "we need to demystify the program and be flexible in implementing it".

He said that the price and exchange rate stability are the basis of the economic program, but that "it isn't good if they are reduced to just zero growth of prices, i.e. a one dinar to one DEM exchange rate".

Marsenic said a correction of prices would help stabilize the economy and market more than efforts to keep levels established in January.

He said that the same is true for exchange rates and asked whether the program should be identified with fixed rates and whether devaluation really means it will be abandoned if there are urgent needs for foreign currency with diminished possibilities to meet those needs.

He also analyzed economic growth and warned that it didn't mean progress but a return to previous conditions. He noted that economic growth does not have any healthy economic backing. Marsenic added that it was growth that produces losses with no consequences for the loss makers.

"We have to see clearly that most of the economy can't cover its expenses through prices, that capital is being used for current expenses and that reserves are being used instead of being left to posterity," he said.

Yugoslav National Bank Governor Dragoslav Avramovic wasn't at the meeting to hear those warnings. Interestingly, the day the economists were formulating recommendations for the Governor and Prime Minister, Avramovic paid a visit to the Yugoslav United Left (YUL) party. He was seated next to Serbian President Milosevic's wife Mirjana Markovic during the closed-door meeting with "seriously imaginative people", as he put it.

Serbian Prime Minister Mirko Marjanovic wasn't at the economists' meeting either, even though he was scheduled to be there. It seems that an "important political meeting" on economic policy for the coming year was held on the night of December 4-5. They probably decided that Marjanovic should not make any public statements on economic policy. The Serbian stands can only be guessed.

Serbian Deputy Prime Minister Svetozar Krstic told a press conference by his New Democracy (ND) party on November 1 that there was no truth to rumors of devaluation. He added that the National Bank had imposed measures to stimulate exports. He also said that "the dinar exchange rate was not the program's only anchor" and added that the budgets would be financed from real sources.

Did Krstic see backing in real terms for the "factual devaluation" of 33% (23 November) that the federal government imposed through stimulative measures for the purchase of 25% of the foreign currency income of commercial banks? The Serbian government is certainly keeping quiet about filling up the budget by late October with the approval of the Serbian parliament, but isn't asking for approval for funds coming into the budget now (which means it is collecting taxes illegally).

Some things can be concluded about the intentions of the Serbian government, perhaps even with more accuracy than from the deputy Prime Minister's statements, from speeches by experts from the Economic Institute. They always take Marjanovic's side.

Those experts advocate a return to January 24 policies. Nebojsa Savic, newly elected president of the Yugoslav Economists' Alliance, feels the export stimulation should be abolished (i.e. the factual devaluation) and the fixed exchange rate preserved unconditionally. He recommends a restrictive monetary policy including credit restrictions for companies with surplus stock and companies that do not repay debts. He also wants public spending reduced to 35% of the social product, a social program, etc.

"The primary goal of economic policy in 1995 is stability of prices, the dinar and fixed rates, but they have to be part of a process of structural adaptation of the economy, restructuring of companies and banks including property transformation and privatization," said Savic.

Interestingly, he also advocated an end to the symbolic monthly payments out of old foreign currency accounts. Just one year ago, he said that any single anti-inflation measure could never be repeated.

Members of the Economic Sciences Institute proposed a new model of economic policy for next year, with a floating exchange rate and lower limits on budgets.

Stojan Stamenkovic, Aleksandra Posarac, Mladin Kovacevic and Milena Jovicic feel that economic growth of 3% would raise the social product by 24% (from 18.1 to 22.4 billion dinars), but would have a cost of about 80% inflation. If public spending was lowered to 35% of the social product, the economy would be left with 3.4 billion dinars. They included increasing unemployment figures by another 350,000 and freezing salaries at the current average of 276 dinars, as well as limiting public spending to 8.7 billion dinars (less than this year's 10 billion, but still with a deficit of 0.9 billion).

That problem would bring the economy to the verge of profitability, but the money mass would have to be increased quicker than this year (from 242 to 387 billion dinars monthly) since salaries can't be lowered from the current 114% to 25%.

Miroljub Labus and Radovan Kovacevic proposed a one-off devaluation and new fixed rates.

Labus said that current fixed rates were undermined on June 9 when the dinar changed from foreign currency reserves backing to goods. He said that the banking system that had no deposits or savers could not be defended through interest rate policy.

Experts forget that the dinar-DEM rates are no longer a question of economics, but have instead become a political issue. Official devaluation would be seen as political defeat and will happen only if someone decides to beat Avramovic with it.

That isn't in sight yet and it's more logical to expect Miodrag Zec's predictions to come true: preserving the official price levels and exchange rates through wide-spread state oppression. Zec said nothing could be achieved through a better or more restrictive economic policy until we clearly know whether the Yugoslav economy has ended or just begun its transformation. Zec said that "individual costs of protecting collective property are bigger than possible prizes and the methods used to stop privatization are the destruction of creativity".

Prime Minister Radoje Kontic did offer a vision of stability for next year. He said that the social product would stand at 20 billion dinars this year, but added that 51% of it would be used for public spending, 10% more than proclaimed levels. That level would drop slightly next year if the social product increases by 4 to 7%, but the salaries of army officers, policemen, parliamentary deputies, doctors and teachers would stay the same. The main problem are salaries, which rose in real terms by 37% this year and account for 65% of the social product. If they were kept at current levels next year, that figure would rise to 90% if the social product rises by 7%. That can't be covered without printing more money and Kontic is promising another year without inflation.

Kontic's speech was "full of meaning". The social product rise of just 7% means current production levels won't be kept because, as Ljubomir Madzar said, that would raise it by 20%. Admissions that public spending still accounts for over half the social product topple the idyllic image of state stability and the current salary levels do not permit a new investment cycle. Therefore, Kontic's prediction that the lifting of the sanctions should not be expected early next year but that "they have to fall" is more of an appeal than a prediction.

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