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March 6, 1995
. Vreme News Digest Agency No 179
The Fate of the New Dinar

Atonement of the Primary Sin

by A. Milutinovic

If the proverb an ill beginning, an ill end is to be believed, then we should conclude that from the point of view of the economy, 1995 will be much more difficult than 1994.

All branches of the economy fell short in January, with the exception of coal and oil producers. It is not expected that the negative trend will stop in February or March. If the seasonal factor is excluded, because the domestic industry's production in January has never been higher than December's, then the drastic drop in production is the direct consequence of a restrictive monetary policy and the proverbial insolvency of the economic and banking systems. Such a situation will last until the end of the first quarter, because the NBJ has promised very firmly that it won't increase the money mass from December's level of 2.4 billion dinars, until March 31.

If the NBJ carries through its commitments consistently, then the total money mass by the end of the year could reach 2.6 billion dinars at the most, but only in the case that the social product increases by seven percent and industrial production by nine percent, which has been projected in the Federal Government's economic policy for 1995.

But, if production drops in the meantime, the NBJ would have to, in accordance with the adopted monetary policy, withdraw a certain quantity of dinars from circulation. It follows that it is a good thing for the economy that the NBJ froze the money mass in the first quarter at December's level. If this hadn't been done, then it would have had to withdraw around 550 million dinars from circulation, so that the money mass would drop to 1.85 billion dinars. This practically means that by freezing the money mass, the NBJ is now conducting an expansive monetary policy, because there are less commodities on the market, while the quantity of dinars has remained the same.

Pessimists claim that the NBJ will not be able to hold out with such a rigid approach to the primary issue, because it will have to reduce the entire money mass to two-thirds of the present amount in the near future, which will block all further economic activities. All the more so, as there are only 30-40 million dinars on the giro accounts of 100 domestic banks. At the same time, the "minuses" are practically at the same level, so that the positive difference lies somewhere between five and eight million dinars.

Obviously, the situation is very complicated. Further monetary restrictions threaten to stop all industrial production, so that the fields will not be sown because 650-850 million dinars for the agricultural spring activities are missing. This money cannot be found in the state budget, among commercial banks, or the producers whom the state hasn't paid what it owes them from last year. All eyes are turned to Topcider (state money printing works), but it seems that extra money for the farmers will not be printed this year. In earlier years, dinars were printed and inflation reaped. This time real means will have to be found, but it is still a mystery from where. The harvest also contains a special social dimension, because agriculture had been declared of strategic importance in the past three years since the introduction of sanctions, because of the need to ensure enough food and avoid hunger. Unfortunately, the solutions are still not discernible. The banks have not managed to return earlier credit and are barely managing to maintain current solvency. On top of everything, agriculture is not an attractive branch because it does not ensure a profit rate like some other businesses. On the other hand, the simplest method of financing agriculture, one which is used in the West too, is the issuing of special papers of value, but here this belongs to the sphere of science fiction. One thing is sure, there can be no more putting off of things, and it will soon become clear how the problem will be resolved.

In the coming period the circumstances under which the domestic economy will function will be even worse. This is the result of the Federal Government's decision, under which, from 16 March, all imports, with very rare exceptions, will entail the paying of special taxes and levies in order to compensate for the tax burden on imported commodities. These two levies lie in the range of 8%-41.5%, and this could produce an automatic increase of a large number of prices by as much as 83%. This decision has been justified with the need to prevent the outflow of meager foreign currency reserves for the buying of various goods abroad. It is, however, more than obvious, that the goal of Federal PM Radoje Kontic's cabinet is to find new sources of income for the federal budget which is getting 5% less from sales tax income this year. These 5% have been given by the Federal budget to the republics in order that they might fill up their "overblown" budgets, so that the Federal budget is forced to find this money by introducing additional levies.

This measure has been met with great disappointment and a protest from a large number of businessmen who claim that the new levies will prevent them from importing necessary raw materials and semi-finished manufactures. It is totally absurd that the imports of oil and oil derivatives and a number of other raw materials have not been exempted from these levies, since most of them have gone up by 51% now.

Regardless of the explanations, it has become more than obvious that the real goal of Kontic's cabinet is to ensure a new source for filling up the federal coffers with real money. All the more so as the NBJ is firmly resolved to keep the state as far away from the printing works in Topcider, as possible. The administration is not very interested in how the new levies will affect the stability of the market and the prices, in spite of the fact that the stability of prices and the rate of the dinar are underscored as priorities of economic policy this year.

Instead of the announced disburdening of the economy, the noose is being tightened. It remains to be seen if the economy will be able to cope with this burden. The consequences of this trumped up decision, regardless of the fact that it took the Federal Government more than two months to implement this measure, will easily be seen in a drop in production. Even though it is childish of the state to transfer the entire burden of the economic stability on others, while avoiding to make any cuts in its sector, the authorities can claim that this conclusion is unfounded, because the federal and republican governments decided to decrease budget consumption in the first quarter by 10%-15%, in comparison to the three-monthly quota.

January data say that this is not enough and that the state is already creating a deficit in its budget. In January this year 998.3 million dinars have been collected for public consumption and that is a lot less than the 1.3 billion dinars which the state managed to collect in the last months of 1994. Obviously, the degree of restriction of budgetary expenses in the first quarter should have been bigger, somewhere around 25%, if a deficit is to be avoided.

With regard to this, experts caution that an eventual deficit could be avoided only in two ways: by printing extra money, or a programmed inflation which would enable a greater flow of money into the budget. Both methods are lethal to stability. All the more so as public consumption could gobble up two-thirds of the country's social product, without the two methods of preserving stability. In conditions of inflation we can expect an even greater reallocation of funds to the state's advantage, and the detriment of the citizens and the economy.

It is hopeless to expect the stabilization of the dinar at the level of the official rate to the German Mark. It will be good if pegging in the near future remains at the current 100% and if the German Mark does not surpass 2.5 dinars by summer. What will happen to the prices is a moot question, regardless of claims by the Serbian Government that the greatest number of firms have taken its advice and returned prices to those of July 1994. This is not visible in shops, and according to official data, inflation passed 12% in January, which at the annual level adds up to 170%.

All that Serbian PM Mirko Marjanovic's cabinet has undertaken of late is reminiscent of the introduction of a price control through the back door. After the famous recommendation, an announcement has been made of a special decree which will prevent monopoly behavior, but whose essence is a control of the prices. If it is known that the Federal Government intends to adopt a law on the control of prices this year, then fears of a return of administrative measures with all the negative consequences, are justified. A general control can fictitiously stop the growth of prices. Such moves bring new shortages on the market and the strengthening of the grey economy which, according to some estimates, is responsible for half the country's social product. It depends on the state and its measures if the grey economy in the coming period will fade away, said Serbian Minister of Entrepreneurship Radoje Djukic, or if things will turn a darker shade of grey.


An Expert's View: Miroljub Labus

The Break Down of the Reform Committee

We have been living through an insolvency crisis in the past four months, a fifth of the banks are constantly in the red, there is no money to credit the sowing, the real costs of credit are over 20% per month, and there is no trace of the National Bank of Yugoslavia (NBJ) Committee for the Reform of the Banking System. It, like the two previous committees was set up with a lot of fanfare, and recently ended up as the failed weapon of a propaganda war.

The economy, however, is at a turning point, and the abandoning of a serious reform, at this moment would only help deteriorate matters. Annually, we lose one current social product, what with the war (in this I include sanctions), the disintegration of the Yugoslav market and the bankrupt socially-owned economy. Without a reform of the state and property relations and without changes in the economic structure, we will not reach this potential social product for a very long time.

Two years passed before our economy started adapting to UN-imposed sanctions. This was the time needed by other economies to adjust to a similar situation. Just like our economy, they too turned to the strategy of replacing imports with domestic productions, albeit a little less efficient, but necessary to satisfy the country's needs.

The short term effects are positive. From a long term view this kind of economic structure leads to new insularity and increased demands for protection from foreign competition. Our experience has confirmed this. Socially-owned firms are very loud in their demands for a total ban on commodities, even though the difference in quality and price is more than obvious. The situation with the foreign currency rate is similar. Protective tariffs on imports have raised the black market foreign currency rate, while the exports rate has remained far below it. But, the defence of foreign currency reserves with a ban on imports, rather than the stimulation of exports, directly discourages production and changes the economic structure in a direction which after the lifting of sanctions will not be able to ensure sufficient income from exports.

The state spends too much. That was the situation yesterday, and the reason for hyperinflation, it is the reason today, when the state's too high realistic income eats up the accumulation so necessary for investing in development. In order to arrive at another potential social product, the state must be decreased. There is no other easy way out.

But this is not all. A serious political reform of the state must be carried out. Once again we have three state authorities which conduct uncoordinated economic policies. For example, Serbia is trying to control inflation with a "voluntary freezing" of prices. On the other hand, the Federal Government is encouraging the rise of prices by raising customs levies. At the same time Serbia has completely stopped the process of privatization, while Montenegro is trying to sell off all of the socially-owned economy that it can.

After the lifting of sanctions, regardless of when this may happen, no one will give us credit for an economic recovery. On the contrary, in order to renew membership in the IMF and the World Bank, we will have to pay back credit and interest which have accumulated in the meantime. The shortage of capital will be no less than it is now. In order that some inflow of foreign investments are made possible, it will be necessary that a capital market functions, that firms are privately-owned, and that there are guarantees of property ownership. In order to achieve this it is necessary to annul socially-owned property, because as long as there are socially-owned firms, the state will have to help them, and subsidize them and show preferential treatment. Honest competition between socially and privately owned firms has never existed, and never will.

It is easier to stop hyperinflation than carry out the reform of a socialist economy. The program of the reconstruction of the monetary system was very vague and contradictory, and changed completely several times, but it did bring stable prices. Economist John Maynard Keynes noticed with regard to hyperinflation in Germany in 1923, that it is possible to stabilize domestic prices with a small foreign credit in gold. The trick lies in the fact that the real money mass is exceptionally low, so that domestic money can, with a little foreign currency support, be tied to the gold standard. If we exchange the gold standard for foreign currency convertibility, it was possible to stop hyperinflation here without aid from abroad and with small foreign currency reserves. But, can economic development be ensured in the same way? This is where real problems crop up, problems which cannot be resolved without a serious economic reform. And this is the reason for the demise of the NBJ Committee for the Reform of the Economic System. Instead of a glass of champagne on New Year's Eve, they had to face the bitter fact that it is easier to climb out of the abyss of hyperinflation, than ensure the prosperity of the national economy.

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