Why is the NBY Governor Disregarding Demands for Devaluation?

The Dinar Protected by the Market

Slack exports are primarily a consequence of uncompetitiveness of the national economy and not of the exchange rate. Consequently, there is no exchange rate that can revive the Yugoslav exhausted economy. It seems that we need foreigners to tell us that we have which products are not so bad, but which do not stand a chance of being sold on foreign markets because of their design from the 70's.

AIM Beograd, December 10, 2001

The end of each calendar year is the time to take stock of achieved results and, as a rule, to haggle over the rate of exchange of the national currency. This time, however, everything started several months earlier, immediately after Predrag Markovic, President of the Political Council of G17 Plus, stated that this non-governmental organisation would run in the next elections with a view to "protecting the reform course". Vladimir Goati, member of this organisation's Political Council, clarified that "G17 Plus cannot support either Djindjic or Kostunica", but that those supporting the G17 Plus would win the elections - "because G17 Plus is the mainstream of the reform course in the country whose economic programme the DOS accepted as its own".

Naturally, reactions immediately followed. This time, the economists assumed the role of political critics. The debate was opened by Bosko Mijatovic, Ph.D., from the Centre for Liberal-Democratic Studies who claimed that "without asking for the price, Dinkic is protecting the value of the dinar in relation to German Mark wanting to achieve his political ambitions irrespective of the fact that long ago costs of the current maintenance of the rate value have surpassed its benefits". His basic thesis was that in the past months the prices expressed in foreign currencies have doubled which resulted in a significant drop of the competitiveness of Yugoslav goods, both on the local, as well as the world markets. Accordingly, the current exchange rate policy has been detrimental for the production. According to him, the devaluation could boost exports because "there is no theory which proves that foreign exchange prices are of no importance for traders. Also, Serbia badly needs to create an export-oriented sector, which can never be done with the current policy of overvalued dinar exchange rate". According to Mijatovic, the strangest thing "is that although even the IMF has recommended the depreciation of the dinar, Dinkic has disregarded such suggestions".

Federal Minister of Finance Jovan Rankovic, D.Oesc, also joined Mijatovic's assessments claiming that until now the burden of maintaining a stable rate of exchange was borne by citizens whose wages were mostly fixed. According to Rankovic, the other element that maintained the current dinar exchange rate were foreign pensions and remittances, which amounted to DM 200 million a month, who also assessed that the total wage bill for 1.4 million workers employed in the Serbian economy is lower than the total amount coming to the country annually on account of pensions and remittances. Finally, the exchange rate was maintained stable at the expense of exporters who got the same value for a German Mark, but who paid their inputs much more which is why "many large footwear, garment, ferrous metallurgy factories, as well as the NIS (The Oil Industry of Serbia) lost their entire capital and are, therefore, facing bankruptcy". Especially interesting aspect of the Federal Finance Minister's assessments is that this was his private opinion and that the Government did not discuss it. He "doesn't know why is it so, nor whether anyone has the right to raise this question, but if he did it he would have to immediately resign as everyone would attack him".

To all this criticism Dinkic only replied with claims that the exchange rate had nothing to do with his political engagement, that basic parameters for determining the exchange rate policy were balance of payment developments, as well as financial flows. Since the balance of payment was positive, claims that the rate was unrealistic were ungrounded. Dinkic also rejected as untrue Bosko Mijatovic's and Jovan Rankovic's allegations that foreign exchange reserves, which in October stood at USD 1.1 billion instead of the expected USD 700-800 thousand, were growing only thanks to the IMF loans and the Basle gold and not because of the domestic transactions. "We would not be able to maintain this rate if we did not have a real basis for sustaining it", concluded the Governor. According to him, "the decision on devaluation cannot be brought by any individual, because according to law the rate is determined on the market". In other words, when the market sends a signal the rate will change.

In this way Dinkic placed the whole story back on track. He showed to which extent the old system (in which it was customary for economists and businessmen to launch a campaign every six months for bringing down the exchange rate) was still alive in many heads despite all stories about necessary reforms. The Government always allowed things like that not even trying to seriously deal with the problem of uncompetitiveness of its economy on the world market. Some objections could be certainly raised against the NBY's policy. It is perhaps possible to consider as justified criticism that the proclaimed floating rate actually is not such in the proper sense. According to the data of Nebojsa Savic, associate of the Economic Institute, real foreign exchange rate which indicates the competitiveness of exports has dropped by two percent as a consequence of the price rise on the domestic market and depreciation of the nominal exchange rate. Stojan Stamenkovic, associate of the Institute for Economic Policy claimed that it was true that the rate didn't fully follow the growth of prices, but since they were mostly a result of the correction of disparities, it was normal for prices to increase while the exchange rate remained the same. Even the Federal Minister of Finance changed his opinion after a month, so that now he claims that "if the exchange rate was to follow 23 percent price fluctuation that would result in skyrocketing of prices".

On the other hand, it should be borne in mind what did the stable dinar bring: the real demand for national currency has increased, confidence in the dinar is slowly being restored and the new saving deposits are being made. The stable exchange rate is decisive for investments and growth of competitive production. Therefore, only the argument about low exports deserves attention. The level of exports is primarily a consequence of uncompetitiveness of domestic economy and not of the exchange rate. Consequently, there is no exchange rate that can change the exhausted national economy and the fact that it could be suitable for a market from quarter of a century ago. Is devaluation for the sake of supporting exporters truly a right alternative? Those in charge of economic policy reply shortly - No! They even claim that export economy itself is aware that devaluation is not a solution. This was evident in the course of the drafting of the next year's export strategy, when it became clear that the greatest problems were the impossibility to obtain guarantees and insufficient support of the state. Thus, as Dusan Zivkovic, Secretary of the Foreign Investments and Export Promotion Agency, said, pharmacists would have no problems with the granting of attests, meat exporters would have no problem with sanitary regulations unadjusted with those of the European Union, etc.

It is no news that Serbia doesn't have its recognisable export product and that the present structure of exports doesn't differ much from that from the late 80's. News is that it seems that we need foreigners to come and tell us that we have some good products which do not stand a chance of being sold on the world market because of their design from the 70's.

Thanks to the settled relations with the Paris Club, some problems regarding guarantees and new lines of credit should not be in the forefront next year. New loans should enable the replacement of obsolete technologies in the country so that no longer three to four time more workers would be needed for making one product. All this would result in the increased competitiveness of the Serbian economy, with the exchange rate as just one element of that competitiveness. But, the decision on the dinar value should be left to the market and monetary authorities, which say that "speculators are hoping in vain for one-time devaluation".

"Naturally, this doesn't mean that the exchange rate policy will not be carefully monitored. The dinar exchange rate will slide downwards when it receives such signals from the foreign exchange market", said Radovan Jelasic, the NBY Vice-Governor not denying that NBY has to consider the dinar level reached within one year. According to the Serbian Minister for Foreign Economic Relations, Goran Pitic, a normal process of continued and slight rate depreciation would be considered in the next year depending on the fluctuations of supply and demand, which might give exporters some more space. According to all economic theories, the exchange rate is not only an economic, but also a psychological category. It should only never be allowed to become a political category, which some people obviously want.

Tatjana Stankovic

(AIM)