Arguments and Politics: The Dinar Might Swim

Regardless of the reasons in favor of devaluation, the overall impression is that state bodies are going to postpone the moment to face reality.

Official figures, released at a recent session of the Yugoslav Economic Chamber's Banking Board, show that the overall money mass at the end of the first six months of this year stood at 2.557 billion Dinars. That is 7.4% more than December's 2.38 billion. In that same period, bank loans grew by 21%, three times quicker than the money mass. This year bank loans rose officially to 2.985 billion but there are assessments that the figure is one billion higher.

Officially, the money mass has been frozen and the primary emission is linked exclusively to foreign currency transactions but there are indications that the Dinar is being printed illegally. The gray emission is concentrated mainly in the so-called state and para-state sector. The debts of public companies are estimated at over a billion Dinars, 40% of the money mass. The financial police found that the Beograd Railway company alone owes over 60 million Dinars. The question is how can there be any talk of financing public spending from real sources when public companies owe so much money.

To stabilize the national currency, it's not enough to just formally eliminate the deficit in state budgets, you also have to establish a balance between public expenses and income at a level the economy can survive. That primarily means cutting public spending down to 40% of the country's social product.

The state is right behind the constant degradation of the national currency. The state received loans of half a billion Dinars from the central bank in the first half of the year the impression now is that it has no intention of repaying that debt. If it does not the state has no moral right to ask anyone to exercise financial discipline and that chaos in that field is the greatest obstacle to stabilizing the economy, analysts believe.

The situation on the foreign currency and financial market has been flooded by absurdities for months and radical changes are needed. Annual interest rates of 15% are deep in the zone of realistically negative trends while on the other hand the informal money markets charge interest of between one and 3,500% a year. That still hasn't forced the National Bank to raise its discount rate although all parameters show that the rate should stand at around 100% a year. The flow of the Dinar from legal to illegal channels will force the central bank to take that step sooner or later.

The danger of unrealistically low interest rates, especially after the collapse of banking and 1993 hyperinflation, was reflected in the words of Union Bank president Dragoljub Vukosavljevic who said his bank, at the cost of liquidation, will not approve a 15% annual interest rate for anyone.

He said the parity of the Dinar is also unsustainable and that is damaging to the state itself since foreign currency inflow is lower now compared even to 1993. The one Dinar = one DEM rate will end foreign currency income, he said and warned that on January 1, Union Banka had just one percent of unpaid debts while now 95% of debtors are not paying installments on their loans. "I admit the one percent could have been a problem for Union Banka but the 95% show that something is wrong at the macro-economic level," said Vukosavljevic, and added that savings deposits also dropped by 42%. He warned that without adequate new measures, the economy could easily go into a recession worse than 1993.

Special attention should be paid to economists who urge devaluation. With that step, Pavle Petrovic said, the state would show that it is ready to take things into its own hands again with respect for the real situation on the market and that could provide a positive psychological effect. A realistic course would also increase registered imports and foreign currency income and the finally effect could be increased domestic production, he said and added that there would be practically no negative effects since the black market rates have been built into prices.

Healthy Reasoning

The effects of economic policies melt fast unless they're followed by changes in the economic system and a restructuring of companies and banks.

Notably, per capita production and expenses today are still far below the levels achieved once and the question is: is it possible to achieve more amid the international isolation? The answer is clear: yes, but only if you wade bravely into serious structural changes.

A large number of economic experts pay almost no attention to structural changes or take them for granted.

There are loud suggestions by economically illiterate people recommending stormy activity in issuing loans to stimulate production and exports; i.e. improve the liquidity of banks. They keep repeating the used formula that always provided catastrophic results: stimulate production and exports through the primary emission and that will cause a growth in supply and more stable prices. Some businessmen, used to inflation and a constant source of cash from the primary emission, would support that solution, but only in theory! Plans have been drawn up justifying why production can't get going. They should be released in a couple of months when loans are spent mainly for salaries.

On the other hand, good economists propose economic policy measures aimed at total liberalization: setting the foreign currency rate on the market (as balanced prices for convertible currencies), the same for interest rates with a firm monetary policy, balanced budget and reduction of the participation of public spending in the social product. They believe that would cause a rise in savings, exports, production and living standards.

That stand could not be criticized if the conditions it takes for granted were met: making sure all obligations are met, property safety, an equal access for all to the markets, free international exchange. Unfortunately, those conditions have not been met and the economic policy measures can't provide the expected results.

Healthy reasoning urges us to suggest the removal of the greatest defects in the operations of the economic system. Probably the establishment of firm financial discipline and a stronger mechanism of respect for obligations are the most important things now. The legal basis is there and there are bodies charged with implementing the law. Firm financial discipline, greater possibilities of implementing contractual obligations and the possibility of bankruptcy, more efficient control of commercial banks by the central monetary authorities would create a favorable climate for healthy economic policies and a relatively quick restructuring of banks and companies.