How To Survive a Second Year

On Tuesday evening (24 January, and the first anniversary of the new dinar) state television carried a report from a reception held by Serbian President Slobodan Milosevic. The company was mixed - and illustrates all that has happened to the national currency, what is happening and what will happen. The dinar is the Yugoslav i.e. Serbian and Montenegrin national currency. However, no Montenegrin representatives were present. Federal Prime Minister Radoje Kontic was also missing, that same day he visited the Yugoslav Archives and informed those present of the success achieved in the previous year. At Milosevic's reception the federal government was represented by Nikola Sainovic, one of the vice-prime ministers. He was invited, as set out in the announcement, because he was the Serbian Prime Minister when the new dinar was introduced. There was no mention of the fact that he had been in office during the entire period of hyperinflation (which started when Radoman Bozovic was in office) and that he had been given the job of coordinating that particular policy in the federal government, and that he had successfully opposed it. Next to Sainovic, who sat left of Milosevic, was the present Serbian PM Mirko Marjanovic. According to newspaper archives, since his first public appearance and to this very day Marjanovic has consistently supported the policy of a healthy domestic currency and market economy. His verbal support is spoilt a little by the Serbian budget for this year and agreeing to the current campaign aimed at returning prices to the level of late July 1994. Marjanovic ends the list of guests on the President's left side.

National Bank of Yugoslavia (NBJ) Governor Dragoslav Avramovic sat right of Milosevic, as the living symbol of all that had been achieved during the "Avram's" first year. Next to him was academician Kosta Mihailovic in the capacity of presidential economic advisor, a fact which was announced for the first time -while the last place was taken by Nikola Stanic in his capacity as "coordinator of the team of experts entrusted with the drafting of the Program". The list of guests was small and left the impression of seriousness, something very unusual for receptions of this kind, so that it was natural that none of the members of the team of experts was present, if such a thing still exists after Avramovic's announcement last autumn that a group of Belgrade economists and journalists were undermining a stable dinar. Apart from the former Serbian PM and his readiness to underwrite all policies, the key difference is that between the Governor and the president's economic advisor. Even though neither is enamored of a market economy, the difference lies in the fact that the advisor has been working consistently on it for the past decade, while the Governor believes that a stable national currency and the economic price of production are the fundamentals of every successful national economy. It could prove that Nikola Stanic's presence is a sign that this quiet disagreement is being ironed out, considering that Stanic was the number two man with prospects of becoming the number one man in the NBJ, which he left suddenly to take up the post of Belgrade bank "Investbanka" director.

State television inadvertently drew a picture of state policy and confirmed that the economy here cannot be understood on the basis of economic knowledge alone. It should be repeated however, that the appearance of hyperinflation and its curtailing can be explained only through the will and moves of the ruling regime. Hyperinflation was the consequence of economic factors. It was a means of additional taxation of the economy and the population, and from the point of the authorities, it was all very successful: according to expert estimates, at least two billion US dollars were collected in this way in 1993. The authorities repeat persistently that the reasons for hyperinflation do not lie with them. But after the printing of money was brought to a standstill, hyperinflation was stopped overnight, proving that everything had been controlled by the authorities from the beginning. The uninformed and naive must be told that this didn't happen because of a sudden awakening of someone's conscience or recollection that mandates were won in order to conduct a policy which would be for the good of the populace. Hyperinflation was abandoned when it stopped being useful to the regime, i.e., when the speed with which money devalued was such that it began to endanger the state's income. This is elementary knowledge about inflation, or rather, of its laws, just as it is common knowledge that the curbing of hyperinflation is followed with the immediate filling up of state coffers. Herein lies part of the explanation why the state agreed to stop the deficit financing of the budget in mid 1994, something not be underrated, even though all state deficit was not covered. In order to illustrate our point we will just say that it is natural for the losses incurred by state firms to be covered from the budget. Of course, the state can rid itself of this ballast by selling them off; but there are no signs that such a move is possible in the near future, especially not when the matter concerns large systems such as the electrical supply company. The business weekly Ekonomska Politika recently published a list of the biggest Yugoslav firms on the basis of business balances for the first half of 1994 (because of hyperinflation which peaked in the second half of the year). Serbia's Electrical Supply Company is the third largest company in Serbia considering its overall income, but it heads the losses list for the first six months. On the basis of this loss, it has been estimated that the annual minus will reach around five billion dinars, i.e. the sum total of the Serbian budget for 1995. Of course, the electrical supply company is not the only state firm with losses.

The economy is currently in a very difficult situation, worse than during the height of hyperinflation, said respected accounts expert and Belgrade Economic Faculty professor Jovan Rankovic in an interview to the Belgrade daily Borba, recently. Rankovic estimates that the economy ended 1994 with total losses exceeding ten billion dinars. Of the current policy he says: "I must say that I was flabbergasted when I heard about it. In explaining the measures there were no arguments and everything was greatly simplified. It will be a real catastrophe if they manage to make the companies return the prices to what they were. First of all salaries - 1,800,000 of the employed received two billion dinars gross salaries in the first six months. This is the equivalent of 100 dinars net salaries. Now that salaries have been doubled and even tripled, then gross salaries in the second half of the year will require twice as much money as in the first half. Therefore, production expenses have been increased according to salaries, so that remaining at the achieved level is not possible with prices from the previous period."

In other words, salaries are inadequate for survival at subsistence level (from 1990 until mid 1994 the number of poor in Central Serbia increased from 300,000 to over two million, i.e., every third citizen's income didn't cover elementary expenses). Salaries, however, are too high for the present level of work and the national economy's income. If judged according to the ownership structure in the economy (about 85% is directly state-controlled or through social-party ownership) and the authorities' present policy, it would be unrealistic to expect a positive turnabout.

Antrfile

"Irresponsible and Frivolous"

The federal budget for 1995 (2,115 billion dinars), and the Republic of Serbia budget for 1995 totalling 4,995 billion dinars, and the salaries and pensions policy planned for 1995 (the freezing of the money mass at November's level), show that fiscal adaptation in the sense of decreased public expenditure of the social product to a level allowed by the economy's and the population's (modest) fiscal capacity (a maximum of 35% of the social product plus 3%-4% deficit covered by state borrowings from the financial market) will not take place in the following year. From the point of implementing the Program of stabilization and the policy of a recovery of the economy, this is a very negative policy. Namely, if we assume that the Montenegrin budget will total around 400 million dinars and that the community and municipal budgets will total 1.5 billion dollars, then the financing of Yugoslavia's budget expenditures (without expenses for social security) will be require more than 9 billion dinars, i.e. 40% of the social product estimated at 22.5 billion dinars. In the financing of the Yugoslav Pension and Disablement Social Security Fund (pensions at the level of November 1994 with decreased contributions for the health security of pensioners in Serbia from 17.7% to 10.4% which exacerbates the problem of adequate financing of health insurance in principle, and in this case the treatment of pensioners with health security and their relation to the employed with health security insurance, especially if we bear in mind that elderly persons are the greatest consumers of health services) it is necessary to secure at least 3.2 billion dinars, or 14.2% of the social product. When speaking of pensions, a special problem lies in the fact that December (1994) pensions will be paid out of January (1995) income. The extrapolation of November (1994) income (the majority of salaries were frozen at November's level, while the rates remain unchanged) gives the income for the financing of health insurance and insurance of the unemployed, with a total of around 2.7 billion dinars (12% of the social product). By eliminating transfers between various branches of social security, we arrive at the possible gross income for the financing of social security expenditures in 1995, totalling around 5.6 billion dinars (or 25% of the assessed social product).

It follows, that from the given conditions (tax rates, freezing of the salary mass, pensions totalling 75% of average November earnings) the income for the financing of public expenditure in November 1994 and the known budget projections, it will be necessary to ensure around 14.6 billion dinars, or 65% of the social product, for the financing of public expenditure in 1995. It is impossible to find a similar example anywhere else in the world. For a country implementing a stabilization policy, the least that can be said is that all this is irresponsible and frivolous. The creators and carriers of economic policy have informed the public that public expenditure must be balanced and that expenditure must be financed from real income. In the best case, however, net fiscal income will remain at November's level, and could stand at around 11 billion dinars (49% of the estimated social product). Net source income could stand at 11.5 billion to 12 billion dinars, which implies a deficit of at least 2.6 billion dinars (11.6% of the social product). Therefore, the proclaimed policy of a balanced public expenditure and its financing from real sources is, if the projected expenditures are borne in mind, impossible - and this means that the intended stabilization policy will go up in smoke, unless public expenditure is radically decreased.

(An excerpt from an article by Aleksandra Posarac on public expenditure, printed in the December issue of the monthly magazine Monthly Analyses and Forecasts, published by the Belgrade Institute of Economic Sciences.)