Serbia: Monetary and Political Turbulences

Dinar Going Up and Down

AIM Podgorica, October 13, 2000

(From AIM Correspondent from Belgrade)

As if following lessons from a textbook on economic theory which teach that money and politics are inseparably linked even over a short-term, Serbia is recently registering almost unbelievable turbulence of the black-market dinar exchange rate. Just before the elections of September 24, and during the days when Milosevic refused to recognise the election results and step down from power - the dinar exchange rate rapidly decreased so that from the level of 30 dinars for DM 1 of July 17, one German mark went up to almost 50 dinars (upper rate) by October 5 - the day when protests in front of the Yugoslav Assembly building started and Milosevic's regime began to rapidly disintegrate.

Only 48 hours later, when it became clear that the regime would fall and the "democratic revolution" has won, during twenty-day fall of the foreign currency value and unexpected recovery of dinar, the upper exchange rate for German mark was below 30 dinars, and one could get maximum 25 dinars for one German mark. This incredible looping was certainly encouraged by the letter of loyalty Governor of the National Bank Dusan Vlatkovic sent on October 6, to the newly elected FRY President, Vojislav Kostunica, as well as the statement of Mladjan Dinkic, manager of the group G-17 plus, that in the name of the people he had taken control over the central bank, payment transactions service and the customs administration.

Vlatkovic himself informed Kostunica that he had stopped the granting of credits from reserve money issue and sale of foreign currency from state reserves for a trifle of 6 dinars for one German mark. The combined effect of these two pieces of news decreased the foreign currency exchange rate by 38 percent within 48 hours.

This came as a shock not only for black market foreign currency speculators, but also for many citizens who have been converting for years their "nest-egg", i.e. family monetary reserves, into German marks. People were simply scared by this sudden "dinar rise" because the prices remained at a rather high level and this move "halved" their household monetary reserves in two days. Several days later, when money controllers realised that it will take some time for those in Belgrade to constitute the new Federal Government and that the Serbian Government and Assembly were doing everything to stay in power and avoid the agreed calling of extraordinary republican elections - in just one day, the exchange rate of German mark suddenly went up by 15 percent so that on October 13, in major towns of Serbia it was worth 35 dinars and could be sold for 30 dinars. The existing high differential between the selling and buying foreign currency rate points to the conclusion that the black-market foreign currency speculators are still uncertain as to the direction of future political developments - which will directly influence future economic trends.

Everyone is under the pressure of "inflatory" or "anti-inflatory expectations" so that certain traders in imported and similar goods have reduced prices (because they were formed on the basis of the old high exchange rate), while others are wisely waiting to see whether after it stabilises its power, DOS - the winning political coalition - will start destabilising the money by starting the reserve money issue of the dinar.

As already mentioned, the new cycle of economic erosion in Serbia started two months ago, immediately after the calling of the September elections - and would have probably quickly brought the citizens to a state of even greater shock - the shock of the already experienced hyperinflation. Namely, in these two months, dinar lost 55 percent of its value vis-à-vis foreign currency (10 percent in the last ten days before the elections), and, according to Dinkic, had deterioration continued at that pace dinar would have fallen by fantastic 1,262 percent at the annual level. Incidentally, just a few days after the elections, Vice-Governor Zarko Trbojevic admitted that within eight months FRY registered an external balance of payment deficit of 900 million dollars, while in that same period the trade deficit reached 1,4 billion dollars. It is unusual that, although recognising these figures, he was also surprised at such explosive decline of the dinar value and attributed it to the alleged unrealistic flight of enterprise and bank funds into foreign currency because of the so called, political and psychological reasons.

Even during days when the dinar value was up, there were many reasons for political-psychological turbulences. Greatest excitement was caused by vague news on various mysterious planes which were taking away people's money, while the episode with JAT DC-10, which was unexpectedly subject to control in the night between October 6 and 7, and which was flying for China, was particularly dramatic. Namely, rumours started spreading that it was carrying a container with Yugoslav gold and foreign exchange reserves (allegedly 10.5 tons of gold worth some 100 million dollars). The control, which was carried out on the basis of an anonymous tip that a bomb was planted on board JAT DC-10 which was why it did not take off on time, revealed nothing suspicious. It turned out that the boss of the Belgrade Bank and, allegedly, the main keeper of Milosevic's treasure, Borka Vucic, was in Belgrade and not on Cyprus or in the Republic of South Africa - as some papers have claimed. All this, together with the news that the Serbian Prime Minister, Mirko Marjanovic, had taken control over the police forces - was probably enough for people to once again lose faith in dinar and for German mark to go up once more.

Despite evident wish of the West to help the "democratic revolution" and the fall of Milosevic, as chief of the Yugoslav state - not only by proclamations, but with financial means and by lifting all sanctions, the Yugoslav economy and its financial sector are in such a state that it seems that the dinar has recovered too much and that its growth is far from being realistic.

The only thing certain now is that in the last five months, the money supply increased by five billion and that only half of that of amount was "offset" by the sale of foreign currency on the internal market. It was also confirmed that in the course of this year alone, the National Bank sold over 100 million dollars at the no longer valid official rate to "special users". There is a multitude of information on drained budgets, enterprise losses, various thefts and cases of abuse, which is not helping the stability of the dinar one bit.

That even before the elections the regime was aware that Milosevic's days were numbered, is best reflected in the fact that ten days before the elections, business banks reduced their current account balance by 600 million dinars, converted that sum into foreign currency and probably took it out of the country. After all, the fact that transaction on the Belgrade financial market increased by 100 percent from Tuesday to Wednesday is a telling proof that in the last days of the previous regime everyone who enjoyed any privileges hid away his own and plundered the state money.

Because of all this and many other things, after the electoral victory the new authorities will have to face a trying task of dealing with the actual state of state finances. That state will certainly speed up the preparations for the introduction of a brand new convertible dinar. But, that will not be a "democratic dinar" as William Grader, the American monetary analyst, had ironically put it almost twenty years ago, because money is too serious a matter to be left to democratic decision-making.

Dimitrije Boarov

(AIM)