Politicking Against the Economy

A few days ago, the government once again came under criticism at New Belgrade's Centar Sava for a supposed lack of results, for a slow change in the economic and political systems, for overly intervening in the operations of various companies and enterprises, for insufficient support for exporting, for not giving any credits, and for refusing all along to devalue the dinar.  You are guessing right that all this refers to the Government of Serbia under Zoran Djindjic's leadership.  The federal government is rarely mentioned, probably because it does not interfere too much in its own job of regulating macroeconomic policy, and how could it, anyway, given the state of relations between the two federal units in the Federal Republic of Yugoslavia; or perhaps because the other job of the federal government, economic integration into the system of international institutions, is exclusively done by Miroljub Labus, Vice-President of the Federal Government and Yugoslav Minister for Economic Relations with Foreign Countries; and where work on political integration with the rest of the world is concerned a decisive role is played by FRY President Vojislav Kostunica, who, by the way, is not a member of the Federal Government.

Be that as it may, when all criticism is taken into account, Serbian economic policy since the beginning of this year appears to be taking the middle road between two basic tendencies: on the one hand, whether the Serbian Government should govern, more precisely, whether it should create an economic blueprint for doing business, after which all companies and banks should be left to fend for themselves, or, on the other hand, whether the Government must firstly be the best run company in the entire country.  The best example of hesitation and wavering in the arguments between the two sides can be seen in the relation between the exchange rate of the dinar and its effect on the economy.  Only two months after Mladjan Dinkic, Governor of the Bank of Yugoslavia, announced that a policy of "a controlled fluctuation of the exchange rate" will be applied in Yugoslavia, excluding Montenegro and Kosovo, comments could be heard that the dinar is overvalued for the economically weak and financially and technologically dilapidated Yugoslav economy.  That is why exporters insist that the exchange rate of the national currency must be regarded in terms of a strategic tool in the approach of "exporting at any price."  The effects of this policy on the domestic economy are no longer being discussed by anyone, because they became generally known in the 80's, during the former Socialist Federal Republic of Yugoslavia.  In short, a change in the exchange rate of the dinar at will has only one advantage - a drop in the price of goods for export - and a list of negative consequences on the domestic market which include inflation, a jump in the foreign trade deficit and a drop in the standard of living that is the most apparent from all of the above.

This year, in fact, for the first time it occurred in the history of the Federal Republic of Yugoslavia that the exchange rate of the national currency did not have any negative effect on the price of domestic goods.  The question is whether this is good or bad.  The "standby" arrangement reached and signed with the International Monetary Fund clearly spells out that one of the basic conditions for acceptance into international financial institutions is a policy of a stable domestic currency exchange rate.  This approach, with a firm grip on the budget, on privatization, on taxes and adequate social policies is supported by the World Bank and the European Bank for Renewal and Development, as well as all other European and World financial institutions.  All this and this policy of the exchange rate of the dinar permitted the domestic foreign currency market to operate more or less legally, which permitted the domestic foreign currency reserves to grow from a measly 300 million to a respectable 1.4 billion American dollars, add to this the 400 million dollars in the accounts of commercial banks, with an increase in foreign currency savings to 150 million German marks, all of which leaves critics of the Government and the Central Bank without arguments and proves that it is better to hold to a policy of a steady domestic currency exchange rate than to change the value of the domestic currency at will in order to support export.  Such critics, like respected Ph.D. Ljubomir Madzar, appear to be more interested in whether the company Sevojno will export its goods, when a one time devaluation of the dinar results in the lowering of the exporting price in the world market, without regard for the negative effects of such a move on the domestic economy (expensive raw materials, over-employment, low productivity, poor competitiveness, etc.).  Oddly enough, in cases like this, no one appears to be bothered by intervention on the part of the state and its extended arm, the National Bank of Yugoslavia, in the operations of individual companies.  According to Miroljub Labus, Vice-President of the Federal Government and Yugoslav Minister for Economic Relations with Foreign Countries, appreciation of the dinar is still on the level it averaged between 1996-98.  If the value of the dinar is compared to where it was between 1990 and 1991, the rate of its appreciation is even lower, Professor Bosko Zivkovic claims.

Besides this, the meeting of the Board of Executive Directors of the International Monetary Fund is scheduled for September 19, at which Yugoslavia's fulfillment of the conditions of the "standby" arrangement will be reviewed, and if we get a positive opinion from that Board, Governor of the National Bank of Yugoslavia, Mladjan Dinkic states that the second installment of the IMF credit in the amount of 70 million Euros (i.e. 140 million Geman marks) will be paid out.

It should not be forgotten that a policy of a stable domestic currency exchange rate is driving a good amount of foreign currency out of private budgets and is putting it in legal, bank circulation, which directly affects the level of foreign currency reserves and the credit rating of the domestic banks and the state as a whole, besides the fact that it can indicate fairly precisely exactly how much of foreign currency actually exchanges hands in the country and outside of regular bank accounts.  Governor Dinkic recently stated, while dealing with the issue of exchanging German marks for Euros, that the Bundesbank estimates that of the total of 160 billion German marks in the world, nearly 9 billion are in circulation in Yugoslavia!

The very term "controlled fluctuation of the exchange rate" indicates that the present exchange rate of our national currency is not written in stone.  However, the change of that exchange rate must be, above all, determined by the relation between supply and demand in the foreign currency market, and must be carried out gradually, without jumps of several percentage points, and without intention to devalue the dinar at the expense of inspiring several, large export deals.

In any case, every world currency has its own rises and drops.  The difference between our exchange rates and those set in the world, is that the only possible move here is devaluation (depreciation) of the dinar as a result of pressures from our export lobby, where the effect of this on foreign currency is neither visible, nor is ever mentioned.

Professor Miroljub Labus, Vice-President of the Federal Government and Yugoslav Minister for Economic Relations with Foreign Countries, does not see much leeway in the legal regulation which applies to changes in the exchange rate, where those regulations are applied.  The federal government has no influence on the change of the exchange rate, whereas the central bank can have an influence on it, although it does not have to.  It could do so through a monetary policy of printing money without backing and through the dropping of interest rates, which would result in a massive flow of money into foreign currency and an inevitable hyperinflationary frenzy.

At the same time, this year on the foreign currency market the National Bank of Yugoslavia only appears as an overall buyer, because the availability of foreign currency far exceeds the amount which is actually bough, so that there is little space for influencing the exchange rate.

Perhaps, as Miroljub Labus, Vice-President of the Federal Government and Yugoslav Minister for Economic Relations with Foreign Countries, points out, an attempt to balance the exchange rate of the domestic currency with prices could please both sides: both the export lobby and those who defend the present policy of the exchange rate.  Admittedly, the imbalance which is in effect at present is tipped on the side of price changes, which have been caused by the IMF's demand, spelled out in the "standby" arrangement, that price disparities in strategic economies, such as electrical utility, be removed.  Hence the considerable disparity between price hikes and the exchange rate during this year.  Since, according to our government officials, an end has come to government correction of price disparities, it can be expected that the balancing of prices and the exchange rate could occur by the end of this year, but only as the consequence of economic logic, and not as a result of political pressures and the desire to adapt reality and economic principles to our momentary needs.