Dinar Holding Its Ground

Another economic wonder of the war.  It proved that the rare street dealers of foreign currency were rubbing their hands in vein on Saturday night.  By contrast with the custom during the time of peace, the dealing out of the second instalment of pensions for December of last year was not reflected on the demand for the dinar on the streets.  After they patiently waited for their pensions in ques, pensioners immediately changed ques for those in front of kiosks, pharmacies and grocery stores.  Either they did not even think of foreign currency, or their pensions were too small to cover an eventual demand for foreign currency.

Judging by last week's developments on the economic front, monetary policy will be the axis of stability during wartime.  More precisely, the strength of the dinar will determine the wartime standard of living for Yugoslav citizens, their buying power and therefore the success of the state in implementing a wartime planned economy.  It is because of this that many people noted a warning issued by Ph.D. Djorjde Djukic, a serious economics expert, a federal MP and a member of the Council of the National Bank of Yugoslavia (NBY), that the discrepancy between the official exchange rate and the one offered on the street is very dangerous at this moment.  In a letter he sent to the Federal Premier Momir Bulatovic, Ph.D. Djordje Djukic proposed among other things that the state acknowledge the real exchange rate "which was 55 to 60 percent higher than the official exchange rate before the declaration of the state of war."

Street dealers are presently selling the German mark for ten, and buying it for 9.5 dinars.  Because few foreign exchange dealers can be seen on the streets now a days, the disruption in the market can be produced by a very small total amount of money on the one hand, that is to say their mutual collusion, on the other.  In his letter to Bulatovic, Ph.D. Djikic does not specify whether his demand for "acknowledging the real exchange rate" takes into account official devaluation, or that the "actual exchange rate" will only be acknowledged for companies which, according to new federal regulations, will be obliged to deposit their foreign currency holdings at their commercial bank, which will then direct all foreign currency to the NBY.  Ph.D. Djukic proposes the curtailing of this procedure, after which companies could directly sell their foreign currency to the NBY, "according to the commercial exchange rate."  In this way, Ph.D. Djukic believes that higher flows of dinars could be ensured "with a view to taking care of everyday transactions, for paying personal incomes and for paying suppliers and the state."

What Ph.D. Djukic is proposing to Bulatovic is known by every serious economist.  As long as the NBY holds to the official exchange rate, it will only be able to pay six dinars for every purchased German mark.  In accordance with the decision passed by the Governor of NBY, Dusan Vltkovic, the total amount of money must not exceed five percent, for that will directly lead to loss of liquidity.  Even though they are not economists, pensioners patiently waited for their due at Beobanka in Kolarac St., complaining to the VREME reporter that they fear they wont even get this "little bit" in the future: "It's war."

Given that the demand for dinars is low, both because of the restrictive monetary policy and the fact that salaries and pensions have been spent on stores of food and other necessary articles, many people carefully studies these days the announcement from the meeting between President Slobodan Milosevic and Governor Vlatkovic.  In the announcement it is stated that the meeting "was devoted to the functioning of the financial system and the reorganization of the banking system in the service of efficient adaptation to the state of war."  It was not announced whether there was any mention of Ph.D. Djukic's proposals at this meeting, nor whether there was any discussion of the demand by the Serbian Government for the damages created by the bombing to be immediately repaired.

Regarding the last issue, the former NBY Governor, Ph.D. Dragoslav Avramovic, stated in a brief interview for the "Glas javnosti" daily that the central bank is the principal financier of the state, and that it is a big question what will happen with the stability of the dinar if the Governor has to finance the damages of war.  Translated into everyday language, the former Governor asks whether the NBY will have to print money in order to finance the renewal of what has been destroyed.  Given that the state has decided to lower its monthly interest from 100 to 150 percent to merely 2.2 percent, there is justified fear that few banks will want to approve credits for renewal at such low interest rates, that is to say, that those who have money will instead exchange their dinars for foreign currency.  Such low interest rates can only be sustained, Ph.D. Avramovic warns, if the monthly growth in prices remains below one percent.

For now the present scenario is sustainable, given that the state is controlling retail prices, and will likely continue to do so.

The Federal Institute for Statistics has began to take stock of war damages, but there are no realistic or precise estimates as to its extent.  At one of the recent meetings held at the Serbian Chamber of Commerce, the director of the company "Grmec", Rajko Uncanin, stated that damages to his company thus far amount to over 100 billion dollars.  However, that is what is called direct damage, whereas the amount of damages that will result from reduced exports, which are inevitable, than the drop in production and employment, social programs contributions for workers whose factories have been destroyed or are scheduled to be close - is difficult to estimate.

The interest of the average citizen, who is not spending much time thinking about monetary policy on his way from the bomb shelter and back, mainly centers around how long the companies they work for will be able to give them their salaries.  Companies which paid out their salaries from the beginning of the bombing have not reduced systematically their payouts, although certain factories in the provinces are already planning to pay salaries in goods.  The Federal Government's Decree on Work Obligations During the State of War states that "a director, if he does not have available funds, can pay his employees reduced salaries which cannot be smaller from the smallest salary which is considered an advance, and cannot be smaller than the smallest salary defined by the law or the collective agreement."  It is not hard to suppose that in the significant lack of money which was prevalent even before the state of war, many directors will exploit this possibility, which will directly affect the tax contributions collected by the state, which is based on income tax and tax contributions for those employed.

Citizens could live through the initial lack of money by drawing on their foreign currency savings, but there are not reliable estimates about the extent of such savings.  At the same time, the Association of Foreign Currency Pensioners stated that except for Switzerland, no other foreign government informed them about stopping pension payments.  However, by noting the peace time practice of such pensions coming irregularly, Kis expects that under war conditions, they will come even less regularly.  This means that every month Serbia will be short by a foreign currency stock of some thirty million German marks, which is the total amount of foreign government pensions per month.
Only ten days earlier, a Federal Government decree concerning war sales tax pointed to the state of war.  In the meantime, the state introduced war regulations in the area of export and import, of foreign currency dealings, with work obligations...  The concept of a war economy is not very well known, but as ministers are pointing out, it functioned successfully only in Germany, England and America, and above all because the populations of these countries had faith in their currency.  The conclusion is simple: economic stability will only be possible is citizens do not rush to their local dealers in order to exchange their dinars for foreign currency.

Caption: Sowing Season

Citizens who are afraid of possible shortages of bread and staple foods are pleasantly surprised by the announcement coming form the weekly meeting between President Slobodan Milosevic and Federal and Republican ministers of agriculture, Nedeljko Sipovac and Jovan Babovic.  "The ministers of agriculture informed President Milosevic that projected land for spring sowing for the majority of cultures has been considerably increased by contrast with last year's season, and that all necessary conditions have been secured for the sowing season, with special attention being given to getting and distributing needed amounts of fuel," it was announced from the President's cabinet after the meeting.