Is Inflation Coming Back to Croatia?
Aim Zagreb, July 14, 2000
Six months after the famous January 3, when HDZ lost power in Croatia, the time has come to pay for all pre-election games. The citizens first noticed this in shops and in late June the statistics have registered a 7 percent rise of retail prices compared to last year. Since, at the same time, producer prices went up by 10.6 percent it is certain that inflation will grow even more. Namely, these will also reflect on retail prices, plus taxes and trade margins.
This is the quickest price rise in last six years since the introduction of the stabilisation programme which halted the spiralling inflation of 40 percent per month. Since the beginning of 1994, prices grew rather moderately, and even decreased at times. Just before the last elections, their annual growth was still at rather low 4 percent, which was two times higher than in countries members of the European Union.
Why have the prices started rising right now? Does this mean that the change of power has undermined the price stability? Is inflation coming back to Croatia? Despite disturbing figures, the answer is not simple. Part of that rise has been deliberately programmed by the old HDZ Government, which, naturally with tax payers' money, before the elections tried to buy as many votes as possible. Already in mid last year HDZ increased the salaries of some 250 thousand public servants by 5 percent and, at the end of its mandate, by additional 15 percent. That was the reason why it came into open conflict with the International Monetary Fund, which made the granting of the new financial arrangement conditional on the abandoning of this inflationary move. The HDZ Government decided that it would much rather abandon cooperation with IMF. No price was too high to pay for even the slightest chance of winning the elections, despite the fact that it no longer enjoyed the voters' confidence.
The moment for increasing public servants' salaries was cunningly and cynically chosen. The HDZ Government decided on that move and announced it with a flourish of trumpets. Its realisation, i.e. payment of higher salaries was left to the new authorities. After the elections, the new coalition Government, faced with great obligations and empty treasury, had to come into open conflict with the public servants' trade unions. Despite their fierce opposition, it managed to bring down the promised salaries, but only by 3.5 percent. With this move it somewhat appeased the International Monetary Fund, more by demonstrating its good intentions than by actual change. But, it couldn't reduce the new budget by as much as it promised before the elections.
Naturally, it's not all HDZ's fault. The new authorities tried to cut state expenditures, without first radically reducing the administration and modernising the state apparatus and the entire public expenditures' sector. This had to end with a painstaking attempt at curtailing the amount of specific budget items provoking numerous protests and threats of interested and affected structures. All old consumers of state funds have survived this change and each had to get his share from the taxpayers. That is why the budget is the same as last year, while the promised unburdening of the economy was attempted through the redistribution of the tax burden. The price of labour was cut down, but taxes on the well-known list of products which are every Finance Minister's favourite - from cigarettes to gasoline - went up. Unfortunately, the world prices of oil also increased, so that after two consecutive enhancement this year, the price of gasoline in Croatia is almost equal to that in Germany, i.e. DM 2 per litre. According to the official statistical data prices of oil and lubricants were by 55 percent higher this than last June, of cigarettes by 27 percent, of beverages by 16 percent. Since 1993, Croatia didn't record such percentages, i.e. such price jumps.
Nevertheless, independent economists do not believe that the inflation is returning. The famous Dr Branimir Lokin thinks that all that had happened was a one-time shock, which will end after monopolistic producers raise their prices. The economy, which is operating on the open market, is exposed to strong and cheap foreign competition and bankruptcy is threatening a large number of enterprises. That is why there is no chance for the inflationary spiral to acquire such proportions as to affect salaries. If they are constant, then the price rise cannot continue at this pace. Dr Lokin says that everything will end with the fall of the living standards to the extent necessary to satisfy the needs of the state and monopolistic producers. Dr Zvonimir Baletic, until recently the Director of the Economic Institute of Zagreb, also agrees that there is little danger that the inflation might return. According to him, under current secession and with the open Croatian market no one can uncontrollably increase the prices.
One of the rare economists, who are constantly warning of the inflationary threat, is the newly appointed Governor of the Croatian National Bank, Dr Zeljko Rohatinski. True, he has sent an open message to the authorities that inflation is the simplest way of getting rid of accumulated debts and losses, because it makes them worthless overnight. But, according to Rohatinski, printing money even in two shifts wouldn't be enough to fill the Croatian black financial holes and, in the end, the inflation would nevertheless have to be stopped. It would then be clear that no problem was resolved and that the situation was worse than it had been.
At this moment, these warnings are more of theoretical than practical value. Even without this, the Government of Prime Minister Ivica Racan is living in fear of returning inflation. The reason are bad experiences from the past, but even more the fear that it would prove incapable of managing the country's economy from the very beginning of its mandate. HDZ had preserved the stability of prices and exchange rate for six years and always pointed to it as its greatest achievement. It always sounded good in a country, which had experienced hyperinflation. The new authorities, which brought that in question, would be thus sawing the branch it were sitting on and not with a saw from the medieval pictures, but with a high power-saw.
The return of inflation would instantly break the fragile coalition of six parties which are sharing the power in Croatia and lead to early elections with a rather uncertain outcome. That is why the Racan's Government is reacting to every proposal on changing the current economic policy with great nervousness and intolerance. Even the symposium of some twenty renown economic experts, held these days on the initiative of President Stjepan Mesic with a view to offering some fresh ideas for the overcoming of deep crisis facing Croatia, the authorities interpreted as a plot for bringing them down. They think that they are surrounded by mine fields, whose location they do not know, so that they are afraid to walk off the beaten track", said an independent economist. But, it seems that the largest mine is right on that track which HDZ has beaten in the last six years.
Independent economists, almost without exception, claim that the stabilisation programme, which HDZ implemented in the last six years, has literally destroyed the Croatian economy. It preserved the stability of prices and the kuna exchange rate, but at the same time, led the country into a deep economic depression, which according to essential indicators, is harder that the infamous American crisis from the thirties. Each fifth worker is in the street and every morning hundreds of new job-seekers register with the Unemployment Office. Much more people are employed in the state administration, army, police and public services than in the economy. Croatia is the only transitional country whose exports are lower than they used to be seven years ago.
Some US$ 20 billion have been used for covering the trade deficit, while per capita foreign debt is two times higher than that of former Yugoslavia. Gross domestic product from 1990, is beyond reach, and the economic growth is nowhere to be seen. The main economic topic in the country is not the development, but bankruptcies. Young people have no prospects. It is not only the economy which is in crisis, but morals and relation towards work also, and, above all, politics.
Naturally, this applies to politics which has no vision of new solutions. It is trying to gradually change the HDZ economy, to which the reaction is rampant inflation. These are obviously the times for different solutions. Unfortunately, the new Croatian authorities are afraid of any change and consequently expect that the development will start on its own, primarily just because HDZ's abuse and unprecedented plunder have stopped. For them, anything more than that is harder than resolving the problem of squaring the circle.
Milan Gavrovic
(AIM)