Dividing the Cake

The new measures, popularly called "Avram's Ten Commandments", were packaged at a joint meeting of Federal and Republican Prime Ministers Kontic, Marjanovic amd Djukanovic with National Bank of Yugoslavia Governor Radoslav Avramovic. They agreed to continue the strong monetary policy in the future and that the money in circulation be maintained at 2.4 billion dinars for the time being. This amount of money in circulation implies that the economy can no longer expect credits as lavish as the ones it was granted during the first few months of the implementation of the program of the country's monetary reconstruction and economic revival.

The banks' "spirited" credit activities were subdued in late October after the introduction of restrictive credit-monetary measures; this trend will most probably last until the end of the first quarter of 1995. New credits will be granted only if the firms pay back the previously extended loans. Since there are no citizens' savings, this is the only source for further credit in the economy. Those well acquainted with our economic situation realize that this practically means there will practically be no more credits for the simple reason that the already granted loans are paid back quite sloppily and that the banks are incapable of collecting their debts with the help of the courts even if they wanted to.

All of this leads to the conclusion that the downward trend in industrial production will continue unless something changes. This already happened in November, when it dropped 6.7 percent from the October level, which is the consequence of the October monetary expansion; effects on production will be long-term. At first glance, one might think that the production drop is a disaster. But this is not true. It would have been much better if the state had on January 24 shut the numerous "bottomless wells" which have over the past 11 months swallowed up a lot of money and incurred millions, even billions, of dinars in new losses. The "revival" of production in many "clinically dead" firms was one of the greatest misconceptions of the current economic policy. The continuation of the restrictive credit and monetary policies will therefore call for much more rigorous access to new credits which only firms capable of repayment can expect. Finally and fortunately, the time has come when the central bank will have to worry only about the stability of the national currency and not about the increase in production wages, employment, new investments and God knows what else.

The strongest attacks on the new "package" are expected after the restriction of increasing wages, which have increased almost tenfold in 1994. However, the fact is that wages were the ones that started "eating up" the stabilization program, with the wholehearted help of upset price parities and overall absence of financial discipline. Is there better proof to corroborate this allegation than the statement of Serbian Private Entrepreneurship Minister Radoje Djukic, who recently said that many "privileged" state and socially-owned firms were not contributing to the retirement fund at all!? However, it remains unclear who was able to exempt these, predominantly "party-obedient", firms from pension contributions? Was that done by the Government in which Djukic is a minister or by someone else? If it was not the Government, then the question of who is capable of exempting someone from paying state taxes arises? Nothing is impossible here, not even, as Djukic says, that "someone calls up the State Auditors and tells or asks them to release Mr. X's salary even though he hadn't paid the contributions"! Of course, everything that remains in the hands of the privileged must be paid for by the others; therefore, the consolidation of grey economy should not come as a surprise. People are simply finding ways to avoid the state's enormous taxes which are used to meet the liabilities of "privileged" firms. Hence, there can be no real solution without a radical reform of the tax system which would precisely set out who pays for what and how much.

The commitment to fill the budget only by real sources might be the basis for the optimistic conclusion that preconditions have been created for stable prices. Budget deficits have for years been the hotbeds of inflation, because all those "holes" in the state treasuries were filled by issuing money without backup. However, the trouble is that another hotbed has not even been touched and it is concentrated in the irrational economic structure. The first 11 months have been simply "lost" from the viewpoint of privatization and restructing of the economy, and it is uncertain whether anything will significantly change in that regard over the next year. Also, there still hasn't been any mention of a social program which would serve as the basis for resolving the paramount redundancy in the economy and the state administration, for, without reducing the number of employees to the optimal level, there can be no price reductions, production increases and economical business.

The state bodies' allegations that the proposed budgets for 1995 are "extremely restrictive" are problematic as well. One can hardly consider the increase of Serbia's budget by 74.7% and Yugoslavia's budget by 26% as restrictive, in view of the expected growth of the country's social product by merely 7 percent. This is why many economists warn that even the estimated increase in the GDP is overrated and that any budget increase above that level would represent an inflationary danger. Had Serbian prime minister Marjanovic's cabinet increased the 1995 Serbian budget by "merely" 7 percent, it would stand at 3,060 million instead of the proposed 4,995 million dinars. In relation to this year, Serbia's treasury will have 2,135 million dinars more, which is 20 million dinars more than the Federation will be allowed to spend over the following 12 months! Serbia's and Yugoslavia's state treasuries will together be 2,575 million dinars larger (the nominal growth in the federal budget is 440 million dinars, or 26%).

Attention should definitely be drawn to Avramovic's "Commandment" regarding the stricter control of spending bank funds with the aim of ensuring their "correct operations". Avramovic maintains that stricter control of the operations of banks and other financial organizations may thwart stizung and prevent the financing of stocks "drawn from the market". It is difficult, however, to presume that such a measure will curb stitzung, simply because only 1% of all of the money in circulation is currently in the hands of all 106 Yugoslav banks.

Another difficult queston is whether a restrictive monetary policy will succeed in preventing stizung if one bears in mind that the state legalized a dual exchange rate by introducing 33% export incentives. Even if the Topcider Mint were shut down for the next 12 months, there is no black market dealer who would sell the DEM or the American dollar at the official exchange rate when the state is prepared to pay 33% more. It seems that the competent experts had not borne this in mind or had opted for covert devaluation so that the ordinary citizens would not realize what was in store. Since stizung currently ranges from 60% to 100%, it would be no surprise if the Federal Government soon decides to increase export incentives. Several months too late, Governor Avramovic finally approved changes in the interest rate policy. CES Mekon (financial firm) experts suggested the move early this summer as an instrument to protect the fixed rate of the dinar. Avramovic then claimed that the increase in interest rates could not protect the fixed exchange rate, but now he personally included this move in his "ten commandments", explaining that the stimulation of dinar savings would direct the dinars towards investments rather than the purchase of DEM at the black market exchange rate. These new investments are the greatest reason for the existence and survival of the stizung because everone is aware that there is no money for such an enterprise unless new dinars are printed. Since the state is not abandoning its investment program, the increasing opinion is that a "couple" of unbacked dinars might leave the Topcider Mint anyway.

In order to resolve the undeniable "foreign currency problem", the state has also decided to introduce special taxes on all imports, which will be more rigorously controlled. It wants to stop the unchecked outflow of foreign currency from the country in this way. All these measures show that the state does have "enough" foreign currency reserves, as the reliable figures in the Central Bank recently boasted. Those dictating the price of the DEM on the black market are probably better informed about the details of this state secret.

Domestic economy is therefore entering a new calendar year with many problems. Of course, no one denies that they are much smaller than those last January when monthly inflation soared to 313 million percent, but if the state does not seriously deal with the latest price increases which had affected the real drop in November salaries that resulted from a higher cost of living, then we cannot hope for a rosy future. Much more will become clear in a few days when the Federal and Republican Parliaments end their discussions about the proposed budgets. If the state manages to "push through" its figures, there won't be much reason for economic optimism in 1995.