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July 6, 1992
. Vreme News Digest Agency No 41
Mr. Bozovic's "Moderation" Program

The Internal Blockade of Economic Reasoning

by Dimitrije Boarov

Nothing is casting a brighter light on the Serbian Government's "new measures" than PM Radoman Bozovic's words that the aim of this program is "to moderate the effects" of the international blockade. The announced policy is neither anti-inflationary, nor an economic stabilization policy, nor does it totally centralize the economy.

Already the "prime decision" to peg the dinar to the US dollar, instead of to the German mark, demonstrates that Mr. Bozovic is obsessed with Ante Markovic's anti-inflation program. The only trouble is that the alleged "pegging" of a non-convertible dinar to any world currency is practically senseless, and in a country which is under a total blockade - it makes no sense at all. All the experts' talk that around 45% of Serbia's foreign trade transactions are effected in dollars, that many countries peg their currencies to this particular currency etc., are nothing more than pure gibberish. The foreign exchange rates in a country isolated to such an extent, serve predominantly as a guide for calculating diverse transactions between the business sector and the government. The German mark still remains the key hard currency parameter for every citizen of the most recent Yugoslavia, no matter how "hated" the country that issues it might be, and not even the Serbian authorities' "pro-American" gesture (made when US warships sailed into the Adriatic Sea) can help this. And that key European parameter, despite the news that the mark's exchange value is falling in Kosovo, went up by another 15 and more percent on the black market, on the very first day after the official devaluation.

Of course, the "prime measure", i.e. devaluating the dinar and dropping one zero, was announced by the National Bank of Yugoslavia (NBY) Governor Dusan Vlatkovic, and not by the Serbian PM, but Mr. Bozovic, at a press conference, did not try to hide where all these decisions came from. He said the following: "Since the talks about the new federal government are objectively lasting longer than expected, we have adopted measures which fall (naturally) within the competences of other institutions."

The denomination change, however, brings some novelties, since it is compelling Serbian and Yugoslav institutions to confine the dinar exclusively to the territories of Serbia and Montenegro within their "administrative" borders.

Mr. Bozovic audaciously says that the government will pursue "a monetary unity" and that it will continue providing the Serbian Krajinas with "financial and humanitarian" aid. Nevertheless, his assertion concerning monetary discipline is disclaimed by the NBY's resolution on the monetary and credit policy for the third quarter. As Governor Vlatkovic announced on July 1, 60.3 billion dinars (the newest ones) should be issued during the next three months, this presuming a monthly inflation rate of around 30%. From of this amount, 20 billion would be allocated to the federal administration and the army, and probably to the Serbian Krajinas as well. There are many reasons to believe in a higher inflation rate (prices skyrocketed at the end of June, which statistics will not show before July), that the total calculation of government spending was not done correctly (the already registered galloping inflation was not taken into account), and one must not forget that the final invoice for the survival of Serbs in Croatia and Bosnia-Herzegovina is just starting to be written.

It seems that the entire Yugoslav leadership, and even the Yugoslav expert elite, will find out very soon that no program aimed at restraining the economic chaos can be conceived without normalizing financial relations with the world. The NBY's credit and monetary policy can be nothing but dubious if the public is being assured that the hard currency reserves amount to US$ 1,976 million, while at the same time it is not being told how much of that is blocked until a final settlement is made between the former Yugoslav republics (as a possible ultimate deadline for lifting the economic blockade), and when nothing is being said about what happened with this year's foreign deficit. Serbia's trade deficit alone amounted to US$ 847 million in the first five months of this year. In this regard, it should be noted that a US$ 730 million deficit has been registered for the intermediate goods item in the balance of payments. This clearly demonstrates the Serbian economy's dependence on imports, and its sensitivity to the blockade as well.

Another problem, according to certain experts, is that the new Yugoslavia lacks some US$ 4 billion for economic stabilization. At the same time, Mr. Bozovic's program must count on the leakage of short-term capital amounting to more than one billion dollars. Do we need any more proof that the foundations of the newest dinar are shaky, if we know that the hard currency reserves are so low, and Yugoslavia's solvency "reputation" nonexistent?

Before abandoning the complex sphere of monetary policy, one should point out another dubiety in the monetary part of the program. Up to now, the Central Bank loaned money at 60% annual interest. Now the rate is up to 494% or 16% a month. Therefore, money still does not have its right price.

If one goes back to the main goals of Mr. Bozovic's program, i.e. "to distribute the burden of the sanctions more evenly and eliminate hyper-inflationary tendencies", one can easily perceive that not even the "creators" of the new dinar rely on its unbiased economic arbitration. That's why the Government has recurred to price and wage control.

The control of wages is being introduced mainly for political reasons. If we bear in mind the fact that the participation of wages in total expenditures in Serbian economy since 1990 has dropped from 8 to 4.5%, then it is difficult to speak of a significant inflationary effect of labor costs. Not even the decline in real wages registered at the beginning of the year (which, if continued, would reduce purchasing power by 45.3% in relation to 1991) gave any direct excuse for introducing control. The main point, however, is that the Serbian Government, contrary to opinion of all experts, is freezing the average wage at 200 official dollars (experience says that the average wage is 50% higher than the set minimum wage). That is a sign that it does not really believe in the dinar's exchange rate, that it is avoiding to confront the real average wage of around 50 dollars, that (for reasons known to the Socialist Party) it is concerned about the workers and pensioners with the lowest incomes. Pensioners are being promised an average 100 (official rate) dollar pension by the end of July. That we shall see.

Bearing all this in mind, it is still unclear how many of the 2,305,000 employed in Serbia (end of 1991 figure) will really be working in the months to come. It is known that the official rate of unemployment is already 30% (700,000 unemployed), while the real figure is much higher. Mr. Bozovic himself has said that due to the unjust sanctions, some 100,000 workers are on mandatory leave. If we assume that production will drop by 40% within the next three months, we can easily hypothesize that around one million people will be on leave by September. If we add to that figure the number of unemployed, this comes to nearly two million people, and if the number of pensioners is latched on - then it's no hyperbole to say that the mint will be supporting all of 10.5 million people. In fact, they will be supported by the farmers!

The Government's decision to have the Central Bank give credits exclusively to the Serbian and the federal commodity reserves' head offices (30 million dinars in fresh money, at a 60% rediscount rate) has laid down the institutional foundations for the compulsory purchase of agricultural produce.

One simply must be straightforward here: farmers regard as ridiculously low the price which the Government will be paying for wheat (35 dinars per kilogram). The fact that a better part of Yugoslavia's wheat production (estimated at 2,2 million tons) will be purchased by the Government, will be a result of other factors, rather than of a stimulative government policy.

All in all, Mr. Bozovic's program for "moderating" the effects of the international blockade turned out as to be what it had to, because destitution, powerlessness, poverty, indignation, defeat - simply cannot be moderated.

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