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September 6, 1997
. Vreme News Digest Agency No 309
Expert opinion: Ph.D. Nebojsa Savic

The Weakness of PTT Infusion

The current state of the Yugoslav economy can be described by the stability of the exchange rate and prices, with considerable macro-economic instability hiding behind it.

It is true that the Yugoslav economy is going through a period of price stability, while about 27% of prices are controlled in some way. At the same time, it is also true that industry is increasingly pressing to raise prices, because their costs have gone up; this precipitates increasing expenses for the producers of final products, which ultimately will lead to an increase of prices on the national market. Businessmen expect an increase of domestic sales and a stagnation of exports. Their stand seems surprising, but only at first glance! How is it possible for exports to stagnate when a substantial share of the resources obtained from the sale of the PTT system is being directed to export programs? Is the story of export loans repeating itself, that is, of so called "export loans" which, in fact, end up in the inefficient national production, as unearned wages, or elsewhere.

Businessmen are, in fact, realistic. They are aware that their products can't compete on the national market, due to at least three reasons: first, that expenses are inefficient, which means that cost per product unit is above that of foreign competitors, (and there are numerous reasons for that ranging from low productivity to enormous tax burdens); second, that their products are mostly produced with technologically obsolete equipment; and, third, that their products do not conform to the current standards of the developed markets, which narrows the export market. Facing such a situation at the company level, managers don't have high hopes that their companies can achieve the announced expansion of exports. Another fact is that the structure of our economy has not been adapted to the requirements of the world market, that part of what once used to be our traditional export market has been lost, and that the number of export licenses issued by those countries to our country, (so called quotas), are really modest.

Along with prices, the exchange rate is also stabile; but on the other hand, our foreign currency market is shallow and undeveloped, with many restrictions. The exchange rate stays stabile on the current level, but whether the same policy will be possible after the market has been opened up is a big question.

Do these two pivotal points of "optimism" regarding the great success of our current economic policy really give reason for optimism, as often can be heard from our politicians. Or rather, what kind of objections might, for example, the IMF or the World Bank have if they were to give their estimation of our economy? Their estimation would probably be the following: a storm is coming behind this price stability. Why? Because numerous imbalances and new monetary temptations are hiding behind these undoubtedly important positive elements in our economic circumstance; if we mistake this optimism for reality, these imbalances and temptations could be a source of sudden shocks which could seriously imperil the stability of prices and of the exchange rate.

Where are these risks hiding?

They are hiding, above all, in the enormous fiscal deficit, i.e. in the fact that the government did not succeed in maintaining a balance between expenses and revenue. That is, there is a quasi balance, because the payment of wages and other items that comprise public expenses is not coming from newly issued money (at least, this could not be noticed until June this year), but at the same time, taxes have not been reduced either, and they choke the economy and move accumulation from industry into other government funds. In other words, the balance of public expenses and public revenue is deceptive, but still this is achieved in the first place at a very high level (above 50% of GNP), and secondly, it is accompanied by enormous delays in settling many of the current liabilities through one-sided decisions for non-payment (pensions, healthcare, education). In addition to this, there are also losses in public corporations, the so called quasi-fiscal deficit. The total deficit is estimated to 10% of GNP. This is very high figure which surpasses by four or five times the acceptable level.

Another significant deficit is in the balance of payment; this deficit was 1.3 billion USD last year, and will be even greater this year, considering the current situation. This points at two already well known facts: first, the high dependence of our industry on imports which requires foreign currency, and, second, that production growth is not followed by proportional growth of exports, which partly may be explained by the already described inefficiency, but also by the existence of tertiary activities both in production and exports.

The third important element which hides behind price stability is an expansionary monetary policy, already experienced several times before, which has been especially intensive in the last few weeks, and which threatens to imperil stability. Its causes are multiple and include confusion brought on by numerous commentaries in connection with the character of the money brought into the country by the sale of PTT system.

The question is whether this money can have inflationary effects on our economy, and the answer is positive - yes!!! Anyone can learn this from any serious textbook on macro-economics. But, whether it will have inflationary effects, depends on the economic policy, i.e. on how the money will be spent.

The general risk of "the monetary PTT infusion" to the Yugoslav economy, along, no doubt, with positive side effects, is that it may stimulate "demand overheat", most of all because it will be transferred into the wages and other modes of personal consumption. If monetary authorities start pushing an expansionistic monetary policy, and all facts point to that, then this is the last moment to stop excessive expansion of the monetary mass.

Finally the inevitable question is what choice the creators of economic policy have, in respect to the fact that they have money from the PTT sale at their disposal, and whether the future will bring new PTT cases? The first possibility is to assume that that which has already been achieved thus far is satisfying - the stability after which the storm is coming - and that nothing can be done about further changes to the economic system, and to wait for the political resolution and the lifting of the outer wall of sanctions. In that case, nothing changes, but "the PTT money" is used to plug the holes, and when it is used up, new problems arise. This may be valued as an unfavorable course of events, but one where it may take 2-3 years for its full negative impact to show. We sincerely hope that, despite hesitation in undertaking economic reforms, this possibility will not be the choice of our government.

The alternative is to simulate reform, that is to conduct it in small steps, with much hesitation, delay, complicated procedures and so on, all the while working intensively on the sale of other public companies. With the sale of a couple more companies, this could create space to obtain resources for closing up one part of the public deficit. Reforms would be simulated, a readiness for them expressed, but yet they would not be carried out. The government would have the good excuse that it is waiting for outer wall sanctions to be lifted, and quasi stability would be maintained in the same way it is now. This outcome is quite possible, because it frees the creators of our economic policy from leading long, painstaking negotiations with the IMF and from the duty of fulfilling numerous conditions that this organization imposes. At the same time, it may even happen that some superficial semi-informed "analysts" give prominence to the Czech Republic as an example of a country which has succeeded without significant help from the IMF and the World Bank, but they will be surely forgetting that this was achieved with significant direct foreign investments which came from neighboring Germany. Do we have a rich neighbor who would readily invest in our companies?

The third possibility is to enter into resolute economic reforms, based on a firm political decision, and work on establishing relations with the IMF, the World Bank and other relevant international institutions. Relations with these institutions could be achieved within 2 years, and we could survive until then on money from the sale of other state companies. What makes this option different is that, in this case, we could catch up with the dynamics, although not also with the level of development of the advanced transition economies. The best solution would be for our creators to decide in favor of this possibility, and in this way, practically take a step into the unavoidable process of transition towards market economy.

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