Dinar's Convertibility - Third Time?

Having spent practically five months telling the public that he had prepared 15 economic measures as part of his "Program II" and that he was waiting for the decisions of "other subjects of economic policy," Governor Dragoslav Avramovic started advertizing the suspended program which the National Bank of Yugoslavia (NBJ) Council had adopted on August 29. The essence of the new program can be recognized in Avramovic's assessment that the "current situation is similar to the time prior to January 24 when the economic program was adopted."

According to him, "Program II" includes the Dinar's convertibility, market foreign currency rates (official devaluation), market interest rates, maintenance of the existing monetary mass and strict correlation between foreign currency reserves and primary issue, cancellation of the banks' reserves and suspension of their "minus transactions," conversion of illegal issue of the banks into short-term and long-term debts and the coverage of the conversion by the sale of NBJ and state bonds, cancellation of export and import limitations, reduction of prohibitory customs and other taxes to 10-20 percent with the increase of taxes on drinks, tobacco, cosmetics, the anti-dumping legislature, establishment of legal foreign currency market. All these measures are to be "taken and applied immediately."

This is how Dragoslav Avramovic launched the final "attack" on those who "are afraid of risk", on those "who are not satisfied with the current situation" and are on "different levels of decision-making." At a news conference in Topcider on October 27 and in a statement to Tanjug on October 28, the governor showed his cards and so, ahead of the "showdown in Ohio" and prior to a possible suspension of U.N. Security Council sanctions, offered to take the Yugoslav economy into his own hands.

Although the present situation is so fluid that the actors of the several-month-long Yugoslav dispute on the purpose or nonsense of the official devaluation of the Dinar might "homogenize" their opinions even before this article is published (in the case of a sudden suspension of sanctions), we ought to mention here the arguments of the expert and political circles who opposed legalization of the real foreign currency rates and the arguments of the other group of experts who supported Avramovic's "Program II" and demanded official devaluation of the Dinar. Even the two institutes which usually create the fashion of economic opinions - the Economic Institute and the Institute of Economic Science - have taken opposite sides.

Danijel Cvijeticanin of the Economic Institute, who has the reputation of being opposed to the centers of political power, most explicitly opposed official devaluation. As soon as Avramovic's idea on the re-establishment of the Dinar's convertibility, necessarily followed by devaluation, reached the public in mid-September, Cvijeticanin said that a correction of the official exchange rates would only enhance a raise of prices, salaries and exchange rates, so we should concentrate on the problem of financial discipline instead.

Stojan Stamenkovic, the editor of the Monthly Analyses and Prognoses (MAP) published by the Institute of Economic Science, replied to Cvijeticanin and other opponents of official devaluation in the September issue of MAP. He maintains that all calculations in the Yugoslav economy have been based on the black market exchange rates, and if we recognized the black market rates we would get the real picture of decapitalization of the Yugoslav economy. Stamenkovic, unlike Avramovic, advocates not only devaluation, but also fluctuation of exchange rates. He believes the "disturbance of exchange rates" would cease shortly because insolvency prevents the economy from higher expenditures for the purchase of foreign currency, and the situation is similar with the population. Stamenkovic had earlier named seven negative consequences of the artificial, officially formed exchange rates.

Stamenkovic illustrated his opinion with the estimate that the deficit of the current balance of payments in the first half of this year could have been between 200 and 400 million US Dollars. According to Avramovic's earlier statements, the country's foreign currency reserves were growing, which could only be explained by a "phantom foreign currency income." Since Avramovic is now advocating devaluation, and a governor whose foreign currency reserves were growing would be unlikely to do so, the growth might have been only a temporary one.

It is quite clear that a return to the world market requires convertibility of the Dinar, without which there is no use dreaming about foreign capital. Avramovic attended the federal government session held on October 17. The government assessed that the "lifting of sanctions, expected to take place soon, will set the conditions necessary for the normalization of relations with the IMF, which will ensure approach to the world capital without which there can be no current or long-term stabilization of economy and development of the society," said a statement released from the session. Five documents were mentioned: the economic stabilization program for the 1996-1998 period, the program for the re-structuring of the economy, rehabilitation of banks, consolidation and payment of foreign debt and the social program. In order to supervize all of this, the government has formed a "coordination team" chaired by Prime Minister Radoje Kontic.

Why did Avramovic immediately after the session tell reporters that his 15-point program should be accepted and applied at once? Probably because he is not delighted by the speed at which the government is preparing for the "normalization shock" which would follow the lifting of sanctions.