AVERSION TO REFORM

Serbia on the Move

The manner in which money made by sale of 49 per cent of Telecom Serbia would sooner scare away new investors than be a recommendation for future serious foreign investments

AIM Belgrade, 21 October, 1997

Operation Telecom which provided an "infusion" of fresh capital of about 1.5 billion German marks for the severely sick tissue of Serbian economy is almost completed: the shock dose has been received, just a little is left for next year. Are those who held the "beneficial financial injection" satisfied with effects of the deal? If the aim of the therapy was to give the patient a short-lasting doping in the election year in order to enable those who are in charge of it to seek the true medicine for it - the answer could be partly affirmative. The elections are completed, the political situation is open and fragile, but not definitely lost for the current Serbian regime.

Probably the only thing which both the officials and the critical experts agree about is that the domestic economy is doomed without additional foreign capital. It has operated so far only thanks to "supplements" for the social product which is insufficient even for the standard of living such as it is from an exceptionally high trade deficit. The surplus of import in relation to export was financed in the past few years from unknown sources abroad, on which according to evaluations of experts from the moment of lifting of the sanctions, about 3.5 billion dollars were spent. Although it is impossible to claim with certainty how much money was put aside for this purpose, it is possible to conclude that it is almost spent for the simple reason that there has been no financial source for replenishing the "cashbox". After all, even the official projections of the federal government are founded on an annual inflow of foreign capital of about 1.5 to two billion dollars until 2005.

Therefore, there is no doubt about the fact that foreign capital is necessary. After the first significant investment in the form of privatization of Telecom has arrived in the country, it turned out that theoretical disputes such as "what would happen if" concerning the manner in which the desired capital would be used, have acquired an extremely practical dimension. Respectable economists proposed that the money obtained be used for initiation of changes in the obsolete economic structure - either that the capital be invested in development of telecommunications as a prosperous branch, or that it be used for establishment of a new institution which would deal with investments into a new private sector whose export possibilities would have better prospects. For supporters of this way of thinking, the important thing was that the long expected capital be invested, and not just spent.

However, those who had the power of decision-making preferred quick effects and used two thirds of the capital obtained by sale of Telecom in - consumption. Recapitulation of this option, expressed in figures, briefly could be as follows: by September, money supply reached about 9.5 billion dinars. Foreign currency reserves of the country were increased by about 350 million dollars. In the course of August, salaries were increased in comparison with July by about 27 per cent, out of which by only eight per cent in productive activities, while non-productive activities felt the benefits of sale of Telecom by as much as 74 per cent. This enormous raise in fact conceals payment of arrears in the public sector. The dinar was devalued in the free foreign currency market by about 20 per cent in reference to the German mark.

At the same time, this avalanche of money has not contributed to an adequate production rise - in nine months, industrial production has increased by 8.8 per cent in comparison with the same period in 1996, and September is "better" than August by humble 0.9 per cent. The export "boom" failed to occur: by the end of September, this year's export amounts to 1.68 billion dollars and it is just insignificantly higher than the trade deficit which reached 1.64 bilion dollars.

For the time being, the Telecom infusion has not significantly increased prices, but neither did pensioners get the raise on their August cheques which was due to them by law because of general increase of salaries. If the authorities, as they are tirelessly repeating in the past few days, really decide to defend the newly established exchange rate on the level of about four dinars per German mark, they will have to make the unpopular move of withdrawing a part of the money supply with all the consequences it will have on production and salaries. This will certainly reduce the stock of foreign currency which is at the moment to be found in the central and commercial banks, and it will make the capital obtained by sale of Telecom serve for stabilization purposes, but it will nevertheless be spent "non-productively", for putting out the fire it itself had caused. How and on what we will live next year, remains to be seen.

Greater problem than the disturbed balance in distribution of the social product, which will be re-establish through inflation - the alternative is to make pensions and salaries scarce again - is that by the decision to spend lightly the first serious foreign investment, the authorities have shown that they are not good partners in business. It is hard to believe that possible new foreign investors will like such directly manifested aversion to true reform. It is possible that someone will invest in a "dirty" technology, pressured by high environmental standards of their domestic public. It is also to be expected that foreign investors will give money for "clean" electric power, while coal as irrecoverable resource will be used here. Along with ash and smoke as accompanying phenomena. There will probably be those who are interested in our cement works... but is is highly questionable to what extent such investments will be beneficial for Serbian economy and provide new jobs.

Prof. Dr Miroljub Labus believes that the real reason for the decision to use the money from Telecom in the manner which will sooner scare away than attract new serious and more useful for this country investments is the disguised populist policy pursued by the authorities in the past years. The problem is that besides the threatening unemployment in the near future, the additional problem - foreign debt - is becoming topical, this economist warns. When in two years, the debtors' crisis "catches up" on us and when our country faces bankruptcy, growing unemployment will be convenient only for a policy which will not be disguised, but openly populistic.

The fact that in such sequence of events those who decided how money from the first privatization would be used will become political past by that time will hardly offer any satisfaction to Serbian economy, or rather, to what will be left of it.

Vlastimir Stevanovic

(AIM)