This Time it’s No Joke

April fool's. No one will believe they did it, because it's April 1. That's how a nine-year old kid saw the federal government's decision to devaluate the national currency to six dinars against the German mark. As odd as it may seem, there is a lot of truth in what the boy said. "When a passer-by told me what happened, I thought it was a joke", one of the black market dealers told the B-92 radio on Wednesday afternoon.

It was no joke this time round. After a number of eminent experts failed to persuade the federal government that devaluation is necessary, those who opposed it finally yielded on Tuesday night. The decision itself surprised hardly anyone, although a number of "hard currency players" were caught in the middle of large transactions. The National Bank of Yugoslavia (NBJ) and the federal government kept their decision secret until the last moment, which is why the black market exchange rate remained five dinars to a German mark even on Tuesday afternoon. Some black market dealers knew nothing about the devaluation even on Wednesday morning.

It seems that a number of big corporations knew nothing about the devaluation, so they quickly called off deals involving hard currency when they found out.
Branislav Pelevic, a professor of the Belgrade Economic Faculty, says that the so-called import lobby played a major role in the decision to devaluate the dinar. "I think the import lobby gave in because there was no foreign currency left to exchange at the official exchange rate", Pelevic said.

Pelevic believes that the main reason for the devaluation lies in a huge balance of payments deficit. "The relevant thing is whether this was an isolated attempt to save the national currency or a part of a package. The important thing is to get foreign currency into the country and get the hard currency market going again", Pelevic said.
The new exchange rate should stimulate export and cushion an expected rise in prices. Most private enterprises and street cigarette dealers have already raised the prices of their goods. Government-owned shops were slow to react as usually, but buyers responded quickly and invaded them to but product like milk, sugar, wheat and various spices at "discount" prices.

Mladjan Dinkic, a coordinator of the G-17 group, believes that the devaluation will affect prices while the federal Prime Minister Radoje Kontic expects nothing of the sort. Branislav Pelevic maintains that it will depend on the NBJ's fiscal policy. "If the National Bank of Yugoslavia remains firm, the rise in prices won't hold. There will be no demand and sellers will have to lower prices to what they were before the devaluation", Pelevic said.

Experts of the CES Mekon agency said late last year that a devaluation would lower the prices of domestic products and wages in German marks, which would make the Yugoslav economy more competitive. On the other hand, a rise in the prices of imported goods would reduce the foreign trade deficit. The demand for foreign currency will fall and the supply will increase, meaning that protecting the present exchange rate will cost less. That is why the Montenegrin government's remark that there isn't enough foreign currency to protect the new exchange rate doesn't hold water.

"The National Bank of Yugoslavia reduced the amount of money in circulation since last November, but that wasn't enough to keep the exchange rate and prices stable. Only now do we have a chance to pursue a restrictive monetary policy. We will do everything we can to not print money. We will supervise the banks more closely than ever. We will not give them loans to buy foreign currency, because that was counterproductive in the past", Jovan Petrovic of the National bank of Yugoslavia said.

Petrovic maintains there will be a rise in prices, but adds that most of them eventually drop back to what they were before the devaluation. He reminds us that the federal government has announced a number of foreign trade measures, while the republican government has promised tax alleviation.

All eyes will now focus on public expenditure. The National Bank of Yugoslavia never made an executive decision to print money when there was no need to. Such a decision was always preceded by a budget deficit, which the central bank was virtually ordered to accommodate by putting more money into circulation.

However, the NBJ and independent experts agree that the devaluation is a small drop in an ocean of measures that need to be taken to revive the shattered economy. "Without serious reforms, devaluation won't mean much. Its effects will melt away quickly if we don't follow up with concrete measures", Petrovic told Vreme.