The Euro & Montenegro

People Don't Trust Banks

Out of EUR11 million purchased from local financial institutions by individuals and companies, only EUR200 trickled back.

AIM Podgorica, January 11, 2002

By Jan. 10, 2002 Montenegrins had exchanged more than DM30 million into euros. This does not include another DM160 million, which at midnight on Dec. 31, 2001, was on the accounts of the Payment Transfer Authority and four banks licensed by the Montenegrin central bank, and which were automatically converted.

Considerable public interest in the conversion process brought people thronging to their banks, where they waited in long lines for up to two hours simply to exchange their cash. The EUR30 million dispatched to Montenegro by a German bank was beginning to dwindle at breakneck speed and many feared that it will not suffice to meet demand. Because of that Montenegrin central bank representatives interrupted their Christmas vacations and urgently left for Frankfurt, returning later that evening with a fresh shipment of the European currency.

"As of Jan. 10, EUR55 million has been put in circulation in Montenegro," said Dragana Ostojic, the central bank's chief economist, assuring the public that there would be enough currency for exchange.

If the conversion process can be said to have been more rapid than expected, however, the same does not apply to its entering regular financial channels. According to unofficial information carried by Podgorica media, out of the EUR15 million that left various financial institutions, Montenegrin companies returned only EUR200 in daily deposits.

The remainder ended up under people's mattresses, and in company safes, the latter obviously still keep a portion of their cash outside of legal cash flows in order to avoid paying taxes.

The most striking example of this attitude are companies, some of them state-run, which allegedly withdrew euros to pay December salaries, but actually paid their workers in German marks, thus converting the money illegally.

This practice has additionally complicated estimates of the amount of money circulating both legally and illegally in Montenegro. Ahead of Jan. 1, the Montenegrin central bank officially announced that that amount was estimated at between DM200-250 million, including the DM160 million in bank deposits. Most of this is "home savings," or money that people stash at home or invest into the grey economy, which accounts for 40 percent of all Montenegrin economic activity.

The quantity of D-marks converted into euros so far, however, raised suspicion that there is much more currency outside legal channels than officially estimated. Thus, according to European economic experts quoted by the German edition of The Financial Times, it is believed that there is a total of one billion German marks in Montenegro.

In any case, Montenegrin bankers are satisfied. Savings are on the rise because only DM10,000 can be converted in cash, and this is improving the liquidity of local banks.

Despite a decade of mistrust of Montenegrin banks, however, the four banks licensed for conversion (Podgoricka, Hipotekarna, Crnogorska Komercijalna, and Euro Banka) have registered an increased inflow of savings deposits. If it turns out that this trend is of a more lasting nature, the economy will also profit.

The secret lies in the conversion rules. "Amounts of up to DM10,000 can be converted into cash without commission in the banks, and Payment Authority offices will convert up to DM5,000 free of charge, after which a commission of 0.5 percent has to be paid. To convert greater sums one has to open a bank account," explains Ljubisa Krgovic, chairman of the Montenegrin central bank council.

Montenegro's shopkeepers are, however, in a somewhat different mood, although the fact that the euro has not yet being actually put in circulation, is advantageous for them. Once the conversion process is complete, the major problems will kick in.

For instance, special cash registers introduced with much pomp last year, are still not equipped with the software necessary to process euros, and it is uncertain when this will be done. In addition, merchants say they will have trouble with change, despite claims by central bank officials that the first shipment of the European currency contained EUR3 million in coins. This is why unexpected price increases are not ruled out, because prices would be rounded off, leaving shoppers without part of their change.

At the same time local retailers are afraid that using the euro will reveal the fact that many foreign goods are more expensive in Montenegro than in their countries of origin, such as Italy, which could prompt Italians, for instance, to attempt a direct thrust onto Montenegro's market and end high profits for local vendors. The arrival of Slovenia's Merkator retail chain, for example, and the opening of its big department store in Podgorica is considered a certainty.

And, at the end, an interesting story: Dejan Dikanovic, 38, of Podgorica, was the fist Montenegrin who converted his German marks into euros, only five minutes after the year 2002 began. As a gift from Podgoricka Bank, he received a savings account with a EUR50 deposit.

Zoran Radulovic

(AIM)