Waiting for Disaster

The dinar devaluated some time ago, except that no one dares tell this to Mirko Marjanovic.  If it’s true that the Serbian Premier is already aware of this, as some experts close to him claim, then it’s not quite clear why he’s befuddling us all by shouting “Catch the thief!”  All the more so since Marjanovic himself, either directly or indirectly, holds those same “thieves” under his control.  And that is the sum of it, as far as the exchange rate of the dinar is concerned.

Everything else is merely a colorful result of an anarchically shortsighted economic policy which works around the black market.  And, for its part, it is shallow (small amounts of money have a large effect), very sensitive (the smallest rumors result in strong reactions) and archaicly organized (there is no timely, reliable information), which is reflected in its exceptional instability.

Well, let’s see what happened to us, and how it happened?

As in previous months, the dinar kept slipping, by the end of last week it finally hit bottom - at one point, a German mark could be had for 6.6 dinars, while at the “peak hour” it went as far as seven dinars.  G.V. (35), a registered Belgrade dealer, told VREME that the exchange rate of the mark began to rise on January 16.  “It rose until January 23, because devaluation was expected, and everyone thought that the mark would be officially worth six dinars, and that a liter of gasoline would go up to seven dinars.  At least that’s what the newspapers, radio and TV were saying.  I think that all this happened for psychological reasons.  Hordes of people came to exchange dinars for foreign currency, and we kept raising the price of foreign currency.”

Last Friday, this VREME interviewee also cited psychology as the reason behind the January 30 drop in the value of the mark: “The newspapers announced that the mark would drop to four dinars.  We do not believe such promises, but those who read the papers do, so that they began to hold onto their dinars.  And we also were short of dinars that Friday afternoon so we stopped purchasing foreign currency.  Everyone was selling the mark at that time, while those who had dinars were waiting for the mark to fall.”
And it did fall — in the morning of Wednesday, February 4, the selling exchange rate for the mark was 4.7 - 4.8 dinars, and the purchasing exchange rate was 5.1 dinars.  “Everyone is holding on to their dinars now, but they’ll soon let go”, said G.V. at that instant.  It soon turned out that he was right: already by late afternoon of the same day (as this text was being put together), dealers in the street were purchasing the mark for five, and selling it for 5.5 dinars.

J.D. (27), one of the Belgrade street dealers, explained the turnaround for VREME: “In the morning I was buying for 4.7 and selling for 5.2, and when I saw that there were dinars in circulation, I raised the price to five and five and a half.  I don’t know what the reason is, but dinars appeared, everyone wanted to purchase marks, so I increased the rate of exchange to five when I buy, and to 5.5 when I sell”.  At the peak hour, the mark went for six dinars.

Why is all this happening to us?  Mirko Marjanovic, President of the Parliament of Serbia, and Ratomir Vico, his Minister without a portfolio, saw in everything a conspiracy of “foreign power centers” (even though now there is only one such center) at whose disposal are the “so-called independent media” and “those who claim to be independent scientists”.  Even if a part of the expected inflation were possible to ascribe to the media and economic analysts (its real cause is an absence of credibility in the government's economic policy, based on empirical observation), still such statements are obtuse, and more becoming of the medieval witch hunts and the communist-McCarthy rhetoric popular in the middle of this century.

Friends: As noted by Ph.D. Dragan Djuric, Associate with the Institute of Economic Science, and Ph.D. Ljubomir Madzar, from the Economics Faculty, neither journalists nor economists have dinars in quantities which would be sufficient to destabilize the existing black market.  And, if nothing else, the Serbian Premier is contradicted by statements made by the Academy of Sciences Member Branislav Soskic, generally known for being very moderate, who said that governments need not be angry with economists for thinking differently, and that “support of a realistic foreign currency exchange rate, and also for its correction, if need be, is absolutely right and there is nothing dissident in that”.
Thus, contrary to the convictions of the Serbian Premier and his Minister without a portfolio, the culprits should be sought among those who have significant amounts of dinars at their disposal.  Namely, to execute a currency shock you have to have — money.  And who has it here?  Obviously, beside banks, there are directors of big public enterprises and important private firms.  In short, exclusively the friends of Premier Marjanovic and Minister Vica.

It has also been observed that companies close to the Serbian Government had exported 600,000 tons of wheat, after which they asked for foreign currency from the National Bank of Yugoslavia to be able to import 400,000 tons.  Why?  Because they used credits for export (until they return them, they get some action going).
For bankers there is information available to the public.  As it was cited in one of the latest issues of Monthly Analyses and Prognosis (MAP) by the Institute of Economic Science, toward the end of last year, Yugoslav banks increased their foreign currency reserves, while they kept their liquidity by borrowing from the National Bank of Yugoslavia (NBJ).  At the same time, the quantity of cash in the total amount of money in the economy once again rose over half.  In the last several days NBJ demanded speedy return of liquidity credits so that over 60 percent of business banks made use of the requisite reserves with NBJ, which explains — by contrast with Marjanovic’s magic wand — the sudden shortage in dinars on the street and in bank accounts.

Besides that, every banker will tell you how badly creditors behave, they do not answer telephone calls and do not heed returning debts, which illustrates best the enormous amounts of unpaid debts.  What is at issue are directors of companies here who, its seems, are impervious to any influence.  That is why the blame for the chaos in the currency exchange market should be sought from among these people, who are mostly friends of the Serbian Premier.

Joke: But, it is most likely that Mirko Marjanovic was merely joking when he accused “the so-called independent media” and “those who claim to be independent scientists”.  Not even he, it seems, could possibly believe the foolishness he uttered.  A detailed analysis of the measures toward stabilizing the foreign currency black market, which the President of the Serbian Government announced in Leskovac, leads us to this conclusion.  These measures indicate that Marjanovic knows who the real culprits are.  As far as Ratomir Vico is concerned, it is still uncertain.  Zoran Lilic, Vice-President of the Government, is one of the rare people who publicly dared to denounce the argument regarding the culpability of the media for instability in the black (and therefore the only) market of foreign currency exchange.

But, let's abandon the idle business of reviewing politically opportunistic, manipulative statements, and let us look at what are the real causes of instability and impotence of the dinar.

On this question, Ph.D. Goran Pitic, Director of the Research Center of the Economics Institute, spoke for VREME: “The causes should be looked for in what is happening at the foundations of the Yugoslav economy, and above all in public spending and monetary policy.  These are long-term causes for instability in the domestic currency exchange rate.  Along with these standard elements, the exchange rate is also affected by price pressures, which, taking into account the present trends and ignoring of inflation, are indicating the need for correcting the exchange rate.”

What’s Marjanovic Really Thinking?

When the measures Mirko Marjanovic announced for stabilizing the exchange rate are taken into account, it becomes difficult to make a link, even an indirect one, between journalists and economists and the shakeups in the foreign currency exchange black market.  Because journalists and economists only assume responsibilities, mainly from the government, its ministers-directors and prominent officials of the ruling Socialist and JUL parties: dinar-backing for taking foreign currency out of banks (all firms buy foreign currency that way); everyone pays for import of energy resources (Dragan Tomic - Jugopetrol); forbidding banks to operate in the red (Zlatan Perucic, Borka Vucic, Nikola Stanic, etc.), stopping companies from settling their accounts with the government (Sartid - Dusan Matkovic and others; list is with M. Marjanovic); first there is paying of taxes and contributions, then salaries (our factory giants on shaky legs); enforcement of the Bankruptcy Law and Liquidation of Unsuccessful Companies (Zastava, IMT, IMR, banks, government...); faster transformation according to the special program (Government of Serbia and Privatization Minister Milan Beko); financing public spending from incomes (all governments here); curbing the gray economy (customs, inspections, writers of tax policies); speedy delivery of goods from warehoused reserves (already carried out successfully by the Government); and a complete social program (government and parliaments).
Well, do we need to wait for the dinar to hit bottom for all this to happen?  Because of ignoring of many of these “measures”, the so-called individuals in positions of responsibility should be sitting in jail.  For, as an old expert in foreign currency matters puts it, “those who pocketed a dinar also helped to devalue it”, or: the measures which lowered it will also help drop it.

Bosnia and Slovenia

In the Yugoslav public there appeared, among other things, explanations for the instability of the dinar of the type “it’s all because Serbs from Eastern Slavonia are exchanging dinars because the kuna is being introduced as currency there” and “it’s all because Serbs from Bosnia are exchanging dinars because there they are introducing a new common currency”.  In NBJ, however, it is claimed that the amount of dinars in circulation in East Slavonia is too low to have any effect on our foreign currency market, and as far as Bosnia is concerned, they answer with the question: “Why would dinars from Bosnia be used for purchasing marks here, when the same can be done there at a better price?”

This expert believes that increased expectations of devaluation were accompanied by a vacuum in the government reaction, which only added heat to those expectations.
G. Pitic, just like Ph.D. Bojan Dimitrijevic and experts at CESM and authors of MAP, is observing that the high export deficit resulted in the emptying of the NBJ reserve, which prevented intervention by the national bank in the foreign currency market.

Precisely because of this, it is possible to say that the dinar has already devalued: according to the official exchange rate since the end of last year, it is only possible to get foreign currency for importing energy resources (that is why these importers are the staunchest opponents of devaluation) and medication (which is why Milan Beko can easily claim innocence).  The Central Bank has stopped all its other interventions in the foreign currency exchange market, with which it more or less defended the rate of the dinar.  One should not listen to statements by Dusan Vlatkovic, NBJ Governor, that today foreign currency reserves are bigger than at the beginning of the Program for Economic Renewal (1994), and that they are higher than at the end of 1996 and of last year.  Admittedly, the Governor did not say anything incorrect; the problem is that those reserves are so low that there is danger of money shortage for purchasing oil, gas and medications.

Holdups: The other questions is how we found ourselves in this situation?  The answer is best known by those in the Serbian Government, which in the meantime kept pushing — with Dragan Tomis being the most adamant, being dubbed “Mr. Simpo” and “Coordinating Minister”— with all its might for barter arrangements for importing gas and gasoline.  While the government was losing money and time on “initiating the production program” with the objective of exporting goods to China and Russia, NBJ regularly intervened in the foreign currency exchange market by selling foreign currencies intended for import, as one central banker says, “mere pennies”.  When the Chinese and the Russians closed the taps (our goods were either lacking or too expensive, or of very low quality), the government rushed to the central bank reserve and emptied it.  For salaries, pensions and other public and private spending, the spent dinars were backed by the sale of PTT.

In the meantime the “Belgrade Bank”, as VREME learned in London, received a six month credit for purchasing energy resources from the ANZ Bank, with 10 percent interest above LIBOR (interbank interest in London), which was a very expensive deal because normal countries get credits for six percent with a term of one year.  Aware of the instability of domestic currency because of poor economic foundations, not even London is interested in crediting anyone here any longer without a minimum of 101 percent certain guarantees.

Waiting for an order to come from heaven, the government reacted in a timely fashion with gasoline price increases.  “Already in May and June, it was clear that the price of gasoline was low.  Why was it not raised then?  NBJ at that time had significant foreign currency reserves and could have intervened in the market”, stated one banker for VREME.

In any case, all experts here (even those who do not dare say it to the face of Mirko Marjanovic) believe that the stability of the dinar cannot be maintained for long.  As CESM experts stated toward the end of last year, postponing means that the reaction will not only be stronger, but also more expensive than necessary.  Bojan Dimitrijevic agrees with this when he says that the momentary stability (probably broken on Wednesday with the paying out of pensions) can only be maintained according to the principle “all hands on board”, after which, he thinks, “will follow a negative change in the exchange rate because of export deficits”.  G. Dimitrijevic thinks that it would not be advisable to undertake official devaluation, being convinced that without an extra 700-800 million dollars in foreign currency reserves, it could not happen.  And Mr. Pitic says: “An Unnecessary rise in the price of the mark discredited the potential idea of official devaluation and significantly disturbed the market, bringing a wave of price increases.  In the event that a policy of spending drops were to be instituted — with this I mean lowering public spending and sharpening financial discipline — then conditions would be created for establishing a realistic exchange rate and opening the foreign currency market.  With a realistic exchange course, NBJ foreign currency reserves would automatically increase, while a parallel exchange rate means that it is dropping.”

But, maybe only a total collapse in the exchange rate and reserves — similar to the hyper inflation in 1993 — will force the present government to behave rationally and responsibly on economic policies, instead of wasting time hunting the “foreign factor” witch, journalists and economists who say what they learned in their professions.