A Step towards Bangladesh

In the series of interviews on our economic reality our guest this time is professor Jovan Rankovic from the Belgrade School of Economics, who is also one of the experts from the Group 17.

The payment operations have slowed down and there is no money. Why?

I can only list some facts that uncover the contents of the situation and open up a possibility to gain an insight not only into why it happened but also about what will happen in the future. First of all, on the basis of the semi-annual statement of accounts in 1996, the gross losses were 7.5 billion dinars, while the net losses were 5.8 billion after the clearance of the gains and losses of companies, since some of the 70,000 companies had gains, allowing clearance.

How enormous this is can be concluded based on the fact that the total calculated amortization and the write-off of fixed assets amounted to 5.2 billion. This means that the negative cash flow, and this is the part of income that does not require the output of funds, amounted to 600 million dinars for six months. Therefore, the net circulation funds, or the portion of the long-term capital used for financing working assets came down to 3 billion dinars, and the needed amount is 23 billion dinars because the value of the stocks was 23 billion dinars. And the financial rule which requires that the stocks, as well as the long-term invested capital be financed from the long-term capital is well known. This means that on June 30, 1996 an additional 19 billion dinars of working capital was needed so that the companies could balance their inflows and outflows. The fact is that the usual solvency can be maintained only this way.

What is the crucial cause of the bad financial situation?

A few years ago, companies entered the zone of losses and that’s where they have remained until today. The losses mean the melting of, first of all, the working capital, since we know that the zone of losses, if not overcome, accumulates the mass of the eaten-up working capital. Further, this means that we had around 3.8 billion in working funds, but the socially-owned companies on June 30, 1996 already had 3 billion dinars of negative net working fund. This means they did not have a single dinar, and the 3 billion dinars of fixed assets were financed from the short-term capital. Therefore it can be concluded that the accumulation of losses worsens the financial situation and, in the long run, threatens financial death.

There are also unsettled high interests. The lowest interests granted by the banks are 8% monthly, which is 150% on the yearly level. This is a good interest rate and everyone is happy to obtain it after a previous 10% or 200% on the yearly level, while the usual interest is 12% or 12.5% (10% plus 2.5 commission), which is 300% yearly. Small private banks charge 15% monthly, which is 500% yearly. No one on this earth can survive this. This is why even the best companies must enter the zone of losses.

The currency rate has also its part in the negative balance of companies...

The depreciated currency rate is the reason why all exporters operate with losses. A greater rate of exports out of the aggregate production results in greater losses. Take for instance the new billionaires who started their businesses with small amount of capital. Take the furniture factory Simpo which sells tea-tables at triple the price of Italy, where it imports from. Why does it import, when it is a furniture manufacturer? Take a look at the structure of imports, and the structure of our production: meat, fish, beverages, cosmetics, footwear, textile. Why? Because the sale of imported goods enables enormous profits.

Which is the most acceptable rate of Deutsch mark at the moment and the yearly interest on loans?

It is the rate around 5.5 to 6 dinars per DEM, then the exporters would favor it because it would enable them to balance earnings and expenses. The interest rate of 10%, plus the inflation of 60% makes the yearly interest rate of 15%.

Except in production, the situation is difficult for the banks too, which are insolvent...

Banks are hit the worst by this situation. The banks which charge enormous interests of 150% to 500% yearly are completely insolvent because their debtors are crippled. They are not only incapable of paying off principles of the matured loans, but also interest.

Another problem is the decline in the scope of turnover and bankers are aware that the interest rate is high, much higher than the inflation rate which is artificially kept low. With such scope of loan potential, bankers simply cannot cover their own expenses. High interest rates suits them, but on the other hand, they draw their clients into losses, and the losses are the very cause of their own insolvency. And when the companies are insolvent, collection is impossible. It is a vicious circle.

The time of clearing the foreign debts is also near...

The obligation of the banks to pay back the loans taken from abroad additionally aggravates the situation. It is assumed that this amounts to 2 billion DEM. There’s no chance to pay back the loans, and the amount is growing like the sourdough. Banks owe a total amount of 37 billion dinars, i.e., 10 billion DEM, to which amount additional sums of 7 billion DEM of potential debt and 6.5 billion DEM of "frozen" foreign currency savings should be added. The potential debt consists of warranties on the deposits issued to the economic subjects and which the economy is incapable of settling. That way the banks, instead of secondary debtors, become primary debtors. The amount reaches 22 billion dinars. Therefore, the real debt of our banks is 17 billion DEM. The foreign banks are putting pressure and it comes out that all our banks are foreign banks, because the debt is several times over their own assets. The reprogramming of debts is currently a matter of life and death; since our companies are incapable of paying, and the warranties are issued by our banks, our banks become principle debtors.

It is clear what should be done, but the question is how?

How and which sequence of steps, this is what the Program of the Group 17 states: first, it is necessary to reconcile with the world, to open the market, to get financial aid, to free our assets kept in Basel, to get short-term loans from the IMF, for the World Bank and the Paris and the London Clubs of Creditors to enable acceptance of SRY.

The companies must present their annual balance sheets. What kind of image should we expect?

The losses will increase from 5.8 billion dinars to 15 billion. The aggregate yearly amortization is 10 billion. Therefore, the negative cash flow will be 5 billion dinars, which means a loss in the substance. Since the total payroll fund is 16 billion dinars, it is covered only by two-thirds, or maybe only by one-third. Now the state and the workers emerge as the involuntary, forced financiers of the economy, because they finance the stocks since their wages are not paid, the taxes are not paid. So now the main financiers of the unpaid loans and unsettled interests of the banks are the state with uncollected taxes and the workers with unpaid wages. From the macro-economic point of view, since they are the buyers, they are at the same time the creditors, and this grows every day, while the credit-rating of the banks diminishes. This situation practically threatens bankruptcy. The same as Suharto did in Indonesia twenty years ago and in Bangladesh.

According to your estimate, when will the bankruptcy of Yugoslav economy happen?

It is inevitable this year if something is not urgently undertaken. But the recovery phase will last at least five years, because now we have over a million and a half pensioners and the funds are emptied. That is why in our program of radical economic reforms we insist on privatization as the only way. We have 60,000 private companies and if 10% of them transferred capital in order to protect themselves, that makes 6000 owners. Everything they have is carefully looked after, and no one deposits a single penny in the banks because the frauds were multi-fold.

Nevertheless, the pre-cardiac arrest stage of Yugoslav economy goes on for a long time; how is it possible that in such situation, bankruptcy has not happened yet?

Were it not for the pensions and remittances from abroad, we would have announced the bankruptcy long ago. These two items make approximately 300 million DEM of monthly inflow, which is more than the aggregate Yugoslav export of under 200 million DEM per month. But from the export gains one must cover expenses, thus this inflow comes as a pure gift; it is like the tenfold export, and comes as an enormous support to the system. It would be even better were it not that the majority of the sum was from Kosovo. And since Kosovo has a parallel economy, they purchase goods from the companies for currency calculating 6 dinars per DEM, because they treat these purchases as exports due to the cash payments. But the factories also live on that. This means that they are injecting the fresh money into the Yugoslav economy through purchases from our companies. However, the purchases are made at very low prices.