The Dinar Strikes Back

You must have heard the saying "what goes around comes around." No matter how stupid it sounds, it is the essence of the currency game played by the Serbian authorities since the hyperinflatory 1993. The dinar is either on the streets in huge amounts or nowhere to be found. Right now, the local currency is short in supply. One of the basic economic rules says that what is short in supply must be expensive, which is why the current exchange rate is only 3.6 dinars against the German mark.

Summarizing an infinite number of complicated economic theories into one simple answer to the question why is the dinar's value constantly on the rise, Stojan Stamenkovic, an associate of the Economic Studies Institute, said: "Because it's nowhere to be found." Where is it, then ?

It is common knowledge that the authorities tried to channel the votes of the electorate during the November elections by putting quite a large amount of money into circulation. Although the monetary impact was controlled and masterminded with the primary intention to pay off the pensioners, the expectable happened: the value of the local currency dropped on the black market. As doctor Stamenkovic said, the black market exchange rate is the finest sensor of the regime's fiscal policy. It is the only market where you can't cover up the actual state of affairs with statistics.

The post-election period: After the elections with an all too familiar outcome, the tailors of the economic policy started withdrawing the money they had printed. In other words, the National Bank of Yugoslavia (NBJ) put out of circulation the excess supply of money by selling more hard currency than it bought. The NBJ sold 138.63 million dollars between January 1 and March 21, and another 16.16 million from April 1 through 21. The central bank put some more dinars back into circulation, so the actual decrease of the money flow was a little lower.

"The rise of the dinar is most definitely a result of a drastic fall in the demand for foreign currencies. The supply of hard currency has remained the same or decreased," says Branislav Pelevic, a docent of the Belgrade Economic faculty. Miroljub Labus, an associate of the Economic Institute, very much agrees with this theory and is actually quite surprised that the supply of hard currency hasn't dropped even more drastically.

It cuts both ways: According to an analysis conducted by the Ces Mekon institute, this is the fifth fluctuation on the black market exchange rate since the new dinar was put into circulation in 1994. The black market exchange rate was relatively stable from January until May 1994. It rose drastically between September 1994 and September 1995, became stable again in December the same year, rose again for a month or two and finally went back to heights close to the official exchange rate. Exactly the opposite was happening with the country's foreign currency reserves in the same period. Ces Mekon representatives maintain that there is a direct connection between the fluctuations on the black market exchange rate and the country's fiscal policy: when the fiscal policy was loose there was more money in circulation and the value of the German mark on the black market grew, and vice versa.

Stojan Stamenkovic says that the amount of money in circulation should stand between 1.3 and 1.35 billion marks in the present economic circumstances . Any amount above that figure is converted into hard currency and disrupts the black market. "The amount of money in circulation here should not be bigger than six or eight percent of the Gross National Product (GNP). The best reflection of this is the situation in Argentina, a country whose parallel currency is the US dollar. Neither the Yugoslav nor the Argentinian monetary authorities have any credibility whatsoever, says Stamenkovic. Ces Mekon director Pavle Petrovic agrees with him, and says that the institute's proposal that the total amount of money in circulation should be 15 percent of the GNP no longer stands because the monetary authorities have lost their credibility. Both Stamenkovic and Petrovic warn that the current restrictive fiscal policy cuts both ways: it has also brought recession, a fall in production and non-liquidity as a result. The difference in the official and the black market exchange rate of the dinar is dangerously close to slipping over the acceptable 15 percent edge.

Bearing in mind that the effects of these exchange rate games are marginal, one must wonder why the authorities are playing them. The possibility that they couldn't come up with a better strategy can't be ruled out, neither can the theory that they simply don't want to take any serious action because of their incompetence, personal interests and the lack of political opportunism. Many believe that the game is just another way for the authorities to suck more hard currency from the population. The expectations are that the present restrictive fiscal policy will result in another devaluation of the dinar.

Big Mac: In order to establish what is really happening with the dinar, it is necessary to determine what it's really worth. One way of doing it is to determine the purchasing power parity (ppp). In theory, one German mark and 3.6 Yugoslav dinars buy the same amount of goods in Germany and Yugoslavia respectively. The Economist, a London magazine, has used the price of the Big Mac, a standard McDonald's hamburger, to carry out this complicated mathematical operation.

The final answer is more than surprising: the German mark should be worth 2.04 dinars rather than 3.6, while the US dollar should stand at 4.1 instead of 5.64 dinars. The conclusion is that the dinar is underrated 27 percent against the German mark and 42 percent against the US dollar. If the experiences of countries in the transition period are anything to go by, the ppp isn't the most accurate calculation. Ces Mekon experts say that the purchasing power rate and the exchange rate ratio in most of these countries is 2:1, in which case exports are not too cheap and imports are not too expensive. This secures a solid balance of payments. A deficit in the balance of payments is not to be ignored because it stood at nine percent of the GNP in Yugoslavia last year. That proves that the realistic exchange rate (the official exchange rate divided by the growth in prices) has been disrupted.

A rise in the realistic exchange rate of the local currency is desirable only in case it comes as a result of a rise in production, which happened in Hungary, the Czech Republic and Poland. According to Ces Mekon, the current realistic exchange rate of the dinar is the one which was in effect last December.

Mexico: One might assume that the local population should be thrilled with the fact that the black market exchange rate is getting nearer the official one. Unfortunately, that's not the case. Withdrawing all that money from circulation has resulted in non-liquidity and recession. In the opinion of most economic experts, the NBJ will simply have to give in and put the money back on the streets. Even if it succeeded in leveling the black market exchange with the official one, the National Bank of Yugoslavia hasn't got the resources to pursue such a policy or keep five billion dinars in circulation. As this is more or less common knowledge, expectations that the central bank will have to give up the official exchange rate will disperse quickly. As a result, every available dinar will once again be converted into hard currency.

A persistent defence of the official exchange rate against the realistic one had disastrous effects in Mexico, whose central bank overrated the national currency to prevent a rise in prices and attract foreign investors. The same thing happened in Great Britain, when Hungarian-born financier George Soros attacked the pound sterling with his billions. It is well-known that Yugoslav citizens and firms often use foreign currencies, namely the German mark, as alternative means of payment. Therefore, the entire panic-motivated process of obtaining as many dinars as possible and then getting rid of them even more quickly is a matter of speculative goals involving no foreign investors at all. What is the best thing to do in the present circumstances ?

Ces Mekon experts advocate the introduction of a flexible, floating exchange rate. From a macroeconomic point of view, the worst thing to do is preserve status quo, a 15 percent difference in the official and black market exchange rate. A policy whose goal is to keep prices stable at the expense of an unrealistic exchange rate is temporarily justifiable but has undesirable long-term effects. A fixed exchange rate with a high inflation results in an overrated dinar and unrealistically cheap imports. Naturally, exports become unprofitable and a huge deficit in foreign trade and the balance of payments is the end result. When that happens, no one on earth believes in a stable exchange rate, and a devaluation of the national currency becomes a matter of days, even hours.

What has history taught us ? Economic stability a month or two before the elections, and then back to printing money. So far, it's a never-ending story.