The Comeback of Hyperinflation

Wednesday dailies report, off the record but from "reliable sources", that the Serbian Government will shortly unwrap a new package of economic measures. It concerns the Yugoslav economic policy since the Serbian proposal, it is emphasized, will be accepted by the Federal Government and the central bank. The concept underlying these measures is almost completely opposite to the one the experts in CES MECON presented to the newspapers a few days ago as their view of the economic policy in the latter half of this year.

The substantive difference between the Government and the experts concerns the Dinar exchange rate insofar as it is revealed that the package does not contain devaluation. Furthermore, the Serbian Government is preparing "significant" stimulation of exports through loans granted to manufacturers of merchandise said to guarantee export profits.

LOANS AND FOREIGN EXCHANGE: Vreme wrote about debates on the effect of export loans in its last issue. This week, Nasa Borba carried the estimate of Danijel Cvjeticanin, Doctor of economics, university professor and associate of the Economics Institute in Belgrade: "It would be disastrous to grant export credits from the primary issue, and as to the lending potential of the banks, I see no resources there that could be assigned to exports, especially in view of the present financial (lack of) discipline." Requests for export loans and "adoption of all available measures in order to realize the planned volume of production" because this is "the only realistic way of calming down price increases, ensuring the growth of the country's foreign exchange reserves, that is the stability of the exchange rate" are coming precisely from the coordination teams under Minister Dragan Tomic. On the other hand, the associates of the Institute of Economic Sciences estimate that

the sum total of export loans would soon reach half of a billion Dinars, and that its beneficiaries would spend part of it in wages, while the other part would go into production for stocks in expectation of better exporting times. If this is added the estimate that the companies would immediately turn a part of these loans into foreign exchange so as to meet the inflation growth and depreciation of their debts with sound money, it is clear why experts warn against the danger of a much higher inflation rate than the one we shall certainly have this year (about 100 percent).

THE SPEED OF LIGHT: If one is to judge by rumors, the Serbian Government's policy is moving in a direction different from the one advocated by Mr. Avramovic, NBY Governor, and opposite to the policy proposed by CES MECON. Pavle Petrovic, director of this Center for Economic Studies and professor at the Belgrade's Faculty of Economics says for Vreme that any export credits are wrong, and the use of the primary issue for the purpose are very wrong. Moreover, encouragement of exports through loans is always accompanied by multiple rates of exchange and countless regulations so that the situation gets out of hand and foreign transactions cease to be governed by any rules. The ultimate effect of such policy for a national economy is the worst, points out Dr Petrovic, as it has been empirically proven that the foreign exchange flees the country as of the moment when the official and black market exchange rate diverge by more than 30 per cent, and under such conditions the exports begin to drop. Another Vreme interlocutor, Dr Zarko Bogetic, the World Bank expert and associate of CES MECON, says that the foreign exchange is leaving Yugoslavia at the speed of light, that is confirms that this is a legitimate phenomenon in economies with the above mentioned differences between the official and black market exchange rates. The wider the divergency the more businessmen who leave their export proceeds abroad. It is not disputable that exports and foreign exchange reserves need to grow, Bogetic explains, but the theory and the practical experience of states with the same kind of problems tell us that the realistic rate of exchange is the best export incentive.

PRIVATIZATION: In a nutshell, in the economic policy proposed by CES MECON until the end of this ear, the main levers are realistic prices of domestic and foreign money and firm credit and monetary policy. Explaining his commitment to genuinely positive interest rates, Dr Petrovic says that he believes that it is necessary to restore the citizens' trust in the Dinar in the first place, that is return to Dinar savings and thereby, the creation of banking capital, however initial and short-term. All other dilemmas in this field are secondary to it, and without the realistic price of domestic currency the inflation cannot be suppressed. What remains is the struggle among the privileged for the distribution of the inflation, and the notes compiled by experts from which future researchers will learn that the government knew what its option meant. Especially if one knows that CES MECON, after a detailed and substantiated economic policy for the latter half of 1995, warned in no uncertain terms that it meant only a short-term stabilization, and that the long-term stability and expansion of the Yugoslav economy were impossible without a radical and expedient privatization as a crucial component of the reforms needed because "the structural characteristics of the Yugoslav economy are a permanent source of economic instability impeding the economic recovery and steady long-term growth".