Playing Devaluation

The dinar was once again devalued last week, so that now a mark, instead of six dinars, is worth 6.3 dinars.  You probably did not manage to catch this news, even though it was aired twice, but do not be surprised — many whose job it is, also did not take note of it.  Perhaps because the decision to devaluate was made by people within whose jurisdiction there are no such powers: Dragan Tomic, Director of the Gas Industry of Serbia and President of the Parliament of Serbia; Slobodan Babic, Chief Executive of the Electrical Utility of Serbia; and Borka Vucic, President of the Belgrade Group of Banks.  Of course, what is at issue are agreements which stipulate that gasoline and electricity will be cheaper for you if you purchase them with foreign currency.

If the conclusion that these agreements mean devaluation is slightly forced — and the truth be told, it is — then it certainly concerns the fact that last week, Dragan Tomic, Slobodan Babic and Borka Vukic signed in front of TV cameras a document on peddling foreign currency.  Let alone the fact that with it they basically broke the Law on Foreign Currency Transactions which forbids the sale of goods and services for foreign currency on the territory of this state.

Besides the fact that this raises hypocrisy in this country to the highest level, it also means that devaluation itself was not, in actual fact, part of an even marginally serious package of economic measures.  It is very likely that Slobodan Milosevic merely accepted it in order to get a few extra dinars, first of all, from exporters, and then from the population at large.  Nevertheless, the behavior of the Serbian and Montenegrin governments in this whole matter is a story in itself.  While the former was an adamant opponent of devaluation, accepting it after getting a sign "from above”, the latter joined experts who advised devaluation, only to denounce the decision once it did happen.

PETTY PROFIT:  In any case, if statements are true made by National Bank of Yugoslavia (by Ratko Banovic, Vice-Governor of NBY last week at a press conference), the government these days is doing more buying than selling of foreign currency.  Judging from the experience of certain citizens, this appears to be precisely the goal.  Even though it can hardly be expected that every bank should at every moment have enough foreign currency for sale, still it is very unusual that A.P. (age 71), a pensioner from Belgrade, was unable to purchase 300 DEM at the Commercial Bank on the five or six occasions that she tried to do so.  This policy has gone so far that recently there is not a dinar to be found.  Not in banks, nor among the street dealers.  Many foreigners are astonished by the fact that they cannot exchange foreign currency in a country that needs it so desperately.  The likeliest explanation is that all the available cash in dinars in banks has been exchanged for foreign currency, and now the banks don’t want to sell it to the population, do not want to channel it into the economy, nor do they want to sell it to NBY.  Otherwise, NBY has discontinued the practice of allowing advances in dinars for purchasing foreign currency, while it has planned for the possibility of banks being able to sell at any moment foreign currency in affiliated banks of the Bureau for Debt Settlements.  The shortage of dinars evidently indicates that they are not doing this — that they are "sitting” on their purchased foreign currency and are waiting.

On the other hand, the conclusion imposes itself that what is at issue is a petty profit — a very petty profit, it could be said — given that state media are relentlessly advertising the sale of foreign currency to banks on a daily basis.  But not even the people are that gullible anymore.  For instance, Ratko Filipovic, a Belgrade taxi driver, states for VREME: "You can already get 6.15 to 6.2 dinars for a mark at the Wholesale Market.  The five percent discount which the state is offering for advance purchases in foreign currency is only acceptable for consideration at the moment.  And this only for short-term uses and in small quantities.  The discount is very close to the exchange rate at the Wholesale Market.  While lost confidence is hard to regain.  We have years and years behind us of these political upheavals, Kosovo and such.  Besides that, there is word about upcoming fuel shortages, sanctions and such.  This means that I’m better off with marks in my pocket, so that even if devaluation comes, sanctions, shortages and the whole bit, with marks I will still be able to buy fuel.  In the short-term we can purchase at a discount in small quantities.  In the long term — it’s out of the question!”  The reasons Mr. Filipovic cites are first distrust, second poverty, and third the political situation.

EXPONENTIAL DEVALUATION: Speaking with VREME, Ph.D. Dana Popovic, Professor at the Economics Faculty, stated that the agreement on foreign currency purchases of gasoline and electricity is leading, not to a double devaluation of the dinar, but to an exponential one (there are street exchange rates, wholesale ones, etc.).  She is not surprised by the existence of several different exchange rates.  "A unified exchange rate is only possible with full, so-called internal convertibility of the dinar.  This means that the dinar would not be convertible only for capital transactions: you cannot buy a house abroad, but you can buy a ton of bronze.”  However, criticizing the existence of different exchange rates, Ph.D. Djordje Djukic, member of an NBY committee and professor at the same faculty, claims that this idea of convertibility is mere illusion.  Ph.D. Popovic’s answer to that is: "It is not an illusion but a precondition for a single rate of exchange.  The precondition for my losing weight is that I stop eating, and not that I go to a Swiss clinic for treatment.”

Ms. Popovic, just like her colleagues Branislav Pelevic and Branko Radulovic, sees the problem in trying to keep a fixed exchange rate for the dinar.  Every one of them, just like Mr. Djukic, are experts on the question of exchange rates and support the move to a flexible exchange rate for the dinar.  On the other side, we have the International Monetary Fund (IMF) which, in a letter personally addressed to Danko Djunic, opted for a fixed exchange rate as the best solution for FRY.
On the basis of the experience of other countries, Ph.D. Popovic concludes that Yugoslavia should change to a regimen of a "crawling band”, while Ph.D. Pelevic counsels a "crawling peg” policy.

It should be kept in mind that all countries of Eastern and Central Europe have abandoned fixed exchange rates.  The Czech Republic did so in a dramatic way.  Because at one point the mark was cheap and the kruna was expensive (just like here until recently), Citibank took out a credit of several billion dollars in krunas, which was the same as if the central bank had emitted that many krunas.  They bought marks with that money, which within the space of one day and one night had caused a black market exchange rate of 15 percent.  The kruna had to devaluate, Citibank sold marks for krunas, returned the credit with less marks and made The Czech Republic poorer by about 15 billion dollars.
Finally, in the discussion of the optimal exchange rate regimen for the dinar, it is worth mentioning Dana Popovic’s criticism of the IMF, especially as many reputable world economists are of the same opinion about the following: the pressure of the Community on independent states in order for a unified currency to be kept; forcing the Czech Republic to stick to a fixed exchange rate; forcing Asian countries into restrictive fiscal policy; a program for Albania which advises a flexible exchange rate at a time of hyperinflation (!?); and the experience that the IMF always accepts competent advice from domestic experts.

PRIMITIVIZATION: Perhaps the best indication of the lack of seriousness and/or sheer incompetence of the authors of our economic policy is the shortage (only for now) of milk and flour.  The cause is the firm insistence on regulating the price of these articles.  Milorad Miskovic, Federal Minister for Domestic Trade, defended price controls, markups and taxes of stocks last week in front of journalists and the entire Serbian Government, which, by the middle of this week, announced that there won’t be price hikes and shortages, obviously not willing to look at earlier experiences.  Not only the experience of the famous Nikola Sainovic, while he headed the Serbian Government, but also of the Roman Emperor Deocletian, who issued an Edict on the setting of prices (sometime in the third century A.D.).

As Ph.D. Gojko Grdjic writes in his book, Economy in the Roman Empire and the Economic Causes of its Downfall, Deocletian issued a decree according to which ?under the penalty of death, no one had the right to sell or buy at a higher price than was stated in the Edict.  Besides that, the Edict stipulated severe penalties for all speculators who hoard goods, waiting for a better price.”  Ph.D. Grdjic cites that the panic which took hold of merchants and consumers, caused by this problem, had only driven prices higher and made the effect of Deocletian’s measures illusory.  Everything began with Deocletian’s lowering the amount of gold in Roman coins, thus causing inflation.  How did it end?  All merchants left Rome, and the state took over their role, which Ph.D. Grdjic calls "signs of the primitivization, toward which the trade of late antiquity was heading.”
Analyzing the economic causes of the downfall of the Roman Empire, Grdjic concludes: "The tragedy of the Roman Empire... lies in the fact that... the reduction in economic capacities was not followed by a reduction in state needs.”

This book of 45 pages should immediately be copied and dealt out to members of the Federal Government.  And to Slobodan Milosevic, of course.