Truth of State

October brought the expected seasonal war between industrial production and satisfaction among businessmen with the overall level of prices which explains the growth of optimism in terms of the short term recovery of the economy but at the same time indicated a crisis in foreign trade. Two good things can't seem to get together.

Prices grew at a rate of 9.9% in October (price increase of electricity not included), which is less than a month earlier (10.2% ). Inflation reached 115% compared to July 1994. That forced the government to impose wide spread administrative prices control. Interestingly, the public didn't oppose that measure although it directly affected the suspension of free market laws. The Barometar reveals the reasons for that reaction. Businessmen are happy with the level of prices they achieved. Asked if low prices are an obstacle to business, just 8.6% of the polled said Yes. Others don't see current price limits as a fundamental obstacle. That means earlier price rises included expected inflationary trends and they can tolerate a price freeze for a while. That is on the average and doesn't mean some businesses haven't been heavily affected.

The included inflation left room for companies to temporarily forget about price rises and that is why inflationary expectations in October were low. Their level should not be underestimated since 39% of the polled businessmen expect their prices to rise in the next three months. That is 5% lower than last month but is still a great danger to market stability. At the same time, the number of people who expect production costs to rise is slightly higher. That number was large and now grew to 80% of the polled.

Black market exchange rates grew. The growth of optimism and lower inflationary expectations should logically be followed by less influence of the psychological factor on the drop in the value of the dinar although an open debate among economic policy makers on the need to devalue certainly played its role.

But, the Barometar reveals the real reasons for the higher exchange rates. The shortage of imported goods (raw materials, power and components) grew suddenly in October now accounts for 44% of all possible limitations on industrial production. That didn't happen in October last year when the first and worst crisis so far hit the foreign currency market.

The announced suspension of the sanctions not only raised optimism despite the difficult situation but also represents a basis without which industrial development can't happen.

Industrial production in October grew by 14% compared to the previous month, far more than expected.

The effect of October's production raised the nine month average industrial production by 0.9% to 2.5% compared to last year. In other words, industrial production is heading for a 4% annual growth rate which is 1-1.5% higher than our estimates.

Assessments of the condition of the economy on one hand and assessments of future trends on the other are still miles apart. Assessments of bad current conditions haven't changed. In October, 36% of the polled said their companies were in bad shape and 59% said the economy was in bad shape. Just 17% of the polled said their companies are in good shape and just 0.6% said the economy is in good shape. Expectations of improvement are changing and optimism is growing. Improved business operations in their own companies are expected by 39% of the polled and 19% said conditions in the economy would improve.

Those expectations did not raise optimism in terms of increased sales on he domestic market. Predictions are that domestic consumption will drop with no compensating increase of exports. Those expectations can only be explained rationally with the short time frame that businesses can survive under the price freeze.

The question is whether businessmen believe in production recovery and market exchange without inflation.

Employment continues to improve in October with higher levels of use of capacities which grew from 50% to 52.7%. October's industrial production growth rose making use of both production factors. However, that trend is not expected to continue over the next three months. Businessmen expect employment to drop, even assuming that production is revived.

Foreign trade didn't change. The number of companies that don't export was the same in October as in September. About 65% of companies do not export but 17% predicted higher exports in the next three months.

It's strange that the growth of optimism in terms of future business isn't linked to lower business risks. The overall risks of doing business remained the same in October.

Finally, I would like to make my own judgment of October's trends. I would be much happier if industrial production continued at expected rates and the year ends with a 2.5% growth rate. That suits the real abilities of the economy at present. Artificial rises in the level of industrial activity raises mistrust in state bodies. Instead of fooling ourselves with an incredible 14% industrial growth rate we should turn to the real problems. Foreign trade ranks highest and a lot can be done before the sanctions are suspended. The growth of the black market exchange rates could significantly shorten the temporary lull in terms of demands for price rises. The advantages of including inflationary expectations in prices could melt away and then administrative control ends.