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May 15, 1995
. Vreme News Digest Agency No 489
An Expert's View: Miroljub Labus

Chronic Inflation

Returning prices to the level of 23 March of this year is an attempt at curbing inflation, just like the earlier returning of prices to the level of 24 July 1994. Both policies are reactions to the abrupt price rise and will have the same results. Chronic inflation is just like any other chronic illness - it can't be treated with aspirins or telling the patient he will get well, while at the same time not undertaking anything to remove the real causes of the malady.

The program of monetary reconstruction was abandoned long ago and this in itself isn't such a bad thing, inasmuch as the fact that the carriers of economic policy do not seem to be aware of the existence and possible consequences of a new program they have been implementing in practice since late 1994.

The program of monetary reconstruction was a good move for toppling hyperinflation by stabilizing the foreign currency rate of exchange, along with the dinar's internal convertibility and the country's low foreign currency reserves. Economic policy is trying (unsuccessfully) to stop the creeping inflation by stabilizing the monetary mass through an (in)formal control of prices, salaries and interest rates.

The program of monetary reconstruction should have resolved the problem of the budgetary deficit in order to maintain the convertibility of the dinar, while the new economic policy is faced with the basic problem of the payments deficit, and without resolving this it will not be possible to maintain the country's meager foreign currency reserves.

The program of monetary reconstruction did not find a lasting solution to the problem of the budgetary deficit. It raised public income, but was forced to postpone the full covering of public expenditure, so that the acquired right to public expenditure constantly threatens to push the budget out of the forcefully established balance. The new economic policy did not find a lasting solution to the problem of the payments deficit. It enforced the balancing of the foreign trade, but every new liberalization will once again open the doors to a deficit and the growth of the black market foreign currency exchange rate.

The program of monetary reconstruction wished to have a stable dinar and encourage production. The new economic policy must sacrifice production growth because all growth of the money mass directly encourages the black market rate and inflation. A lack of dinars, however, raises the price of money and through these costs also influences the growth of prices.

The creators of the program of monetary reconstruction realized very quickly that the program must not rely only on the money policy, but must also carry out a reform of public finances. The new economic program relies too heavily on the money policy and wishes to compensate for its powerlessness by expanding administrative control. On the other hand, tax policy is forcing a large part of the economy to behave like a black economy and is responsible for decreasing public income. Restrictions of the payments balance lead to a budgetary deficit.

The program of monetary reconstruction didn't control the greater part of salaries and prices. The new economic program cannot achieve the desired goal without relying on this control. It has no other way of persuading the world that the value of the dinar is equal to one German Mark, unless it brings inspectors to all doors.

The new economic program emerged slowly from practical daily reactions to the dinar's crisis and inflation. I don't believe that the stand of the carriers of macroeconomic policy will change significantly by autumn, all the more so as none of them know what they are doing, where it all leads and how to harmonize their conflicting interests in the new circumstances. The bitter truth is that it is easier to reach a consensus over the toppling of hyperinflation than on curbing a chronic inflation.

Anglers would say that the tactic of "exhausting the carp" will be implemented. In order to pull out the carp you have caught, you must tire it out first. So, until autumn comes, "crisis directors" will "tire out inflation" in order to make it yield. In September we can expect a new meeting of the crisis headquarters (directors) and the Serbian Prime Minister and recommendations that prices are returned to the level of 24 July, but this time 24 July 1995 and not 1994. It remains to be seen what has to happen before the authorities realize that we cannot defend ourselves from hyperinflation in this way.

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