Montenegro Establishes Central Bank and Eliminates the Dinar

Monetary Sovereignty

Immediately after the prompt reception of FRY in the United Nations, Montenegrin parliament passed the Law on the Central Bank and by decision of its government eliminated the dinar from payment operations and practically rounded off monetary sovereignty of Montenegro

AIM Podgorica, November 17, 2000

“The dinar is the worst currency in the world”, Montenegrin monetary advisors were saying during the operation of introducing the two-currency system. Indeed, Yugoslav dinar was devalued 23 times since 1952, and its exchange rate changed every day in 1993 and 1994. The infamous history of the Yugoslav currency was accompanied by denomination which took place no less than six times. Occasionally the dinar was linked to the mark, occasionally to the dollar, but these foreign currencies always managed to escape from it. Let us be reminded: on October 1, 1993, one million dinars was simply proclaimed to be one dinar, and only three months later one billion dinars was denominated into one dinar. After the introduction of the two-currency system in Montenegro, the dinar was slowly losing its significance, but although modestly it somehow persisted mostly thanks to army salaries and pensions. More or less regularly, ten thousand army pensions and about 20 thousand salaries of members of the army flow into Montenegro every month. By conversion of the salaries in dinars into marks, the quantity of dinars in Montenegro gradually decreased in the course of the year.

Montenegrin farewell to the dinar lasted for a whole year. Finally last week, by passing the Law on the Central Bank the Assembly of Montenegro officially announced rejection of the dinar as a means for making payments in this Republic. This was not exactly a cause of general satisfaction because out of the total of 78 deputies in the Assembly 37 voted in favour of this law and seven abstained from voting. The rest did not vote at all. “With this law”, explained deputy prime minister Ljubisa Krgovic, “a foundation was created for the reform of the financial system without which there can be no healthy economy and no foreign investors”.

According to what he says, the Central Bank will be an independent organisation responsible for monetary policy, establishment of a sound banking system and payment operations. It will not have the power to issue money, but it will issue permits for the work of banks and supervise their business operation, it will control foreign currency reserves, but it will not be able to accommodate the government with loans. Elimination of the dinar from Montenegrin payment operations prescribed by this Law seems to be an attempt to reduce its significance.

“The fact that Montenegro has its own police, customs administration and that the Yugoslav dinar was discarded as the means for making payments does not mean that the door to the union of Serbia and Montenegro has been closed”, said president Milo Djukanovic in explanation of Montenegrin measure of Yugoslavdom, or more precisely that of the Democratic Party of Socialists.

The first article of the new Law on Central Bank says that the German mark, and later the Euro, shall be the only means of payment in Montenegro. After eight days when the Law came into force, this actually happened: the operation of withdrawing dinars from circulation was technically carried out in only three days.

The conversion of the money supply on the accounts amounting to 70 million dinars was completed within that period of time according to the words of Dimitrije Vesovic, director of the Bureau for Clearing and Payments and member of the Monetary Council. Conversion of cash took more time: only 55 thousand mark worth of dinars was converted on November 13 and 14, the days set for the exchange in Montenegrin banks.

With this, the operation “out with the dinar” was practically completed; the only thing left to do was to convert certain small sums of money. This means that in the future it will be able to exchange dinars like every other foreign currency, in exchange offices according to the rules applied normally in exchange deals.

However, this did not resolve the problems for many people who live in Montenegro. The job of conversion has been prepared without any talks with the Army of Yugoslavia – the main importer of dinars into Montenegro. That is the reason why the problem of army salaries and pensions remains open. Montenegrin Bureau of Clearing and Payments relies on the possibility that an agreement on this problem will be reached between Serbia and Montenegro, but points out to certain other possible solution. The citizens who receive pensions and salaries from Serbia will be able to deposit their income in one of the Serbian banks and this money would then be used by Montenegro for paying goods it purchases on that market. In Montenegro that amount of dinars would be converted into marks for these citizens.

As concerning payment of salaries for soldiers and army pensioners, a solution seems to be in sight already. Mladjan Dinkic, executive director of G17 Plus, declared that the members of the army in Montenegro would be paid in marks.

And what will happen with economic cooperation between Montenegro and Serbia? How will the payments be made between the two Republics? In preparation of the Law different possibilities were mentioned. Some insisted that Serbia be treated and payments be made like with any other country that has a different currency, others advocated clearing which implies inter-state agreements on types of commodities, export quotas, common lists etc. But in the end the system of payments through business banks was chosen – the option already tested during the period of operation of the two-currency system and almost interrupted turnover of goods between the two Republics. Payment for goods between Serbia and Montenegro will, therefore, be made through banks which have their branches in both Republics.

Payments will be made, says Vesovic, in the following manner: marks will remain in Montenegro, dinars in Serbia, and the banks with branch offices in both Republics will balance the accounts at parity freely, without state arbitration, determined by parties involved in the deal.

The economies of the one and the other Republic already had plenty of trouble due to these complications after introduction of the two-currency system in Montenegro, and the only ones that profited from it were the banks which introduced a commission for services rendered up to 10 per cent of the transaction value. It is, therefore, not at all surprising that one of the major issues discussed at the recent talks between the deputy federal prime minister Miroljub Labus and representatives of Montenegrin government was the possibility of re-establishment of payment operations between the two Republics.

The message from this meeting was that payment operations between Serbia and Montenegro would be re-established only after the dinar in Serbia became convertible. Labus belongs to the group of economists who supported Montenegrin economic ideas on introduction of a hard currency on the entire Yugoslav monetary territory. But Mladjan Dinkic believes that there should be no problem. “A specific proposal was addressed to the federal government in order to ensure that all business deals be paid in marks through foreign currency accounts of banks”, said Dinkic. How that will operate in practice Dinkic did not reveal.

By passing the Law on Central Bank, monetary sovereignty of Montenegro has actually been rounded off. The process had begun a year ago when the so-called two-currency system was created, that is, when the German mark was introduced into payment operations of the Republic. This is yet another specific characteristic of Montenegro where based on monetary sovereignty, state sovereignty is (allegedly) built, although just the opposite is usually the case, in other words, state sovereignty causes monetary sovereignty.

Dragan DJURIC

(AIM)