WHY NOT DEVALUATION?

Redistribution Fails to Meet Expectations

The government of Serbia is nowadays a sincere opponent to devaluation, because the inflationary redistribution got out of its hand, so it will stubbornly persist with the policy of "price and currency stability" which will degrade the economy again and make it a big loser and mere collaborator of the regime

AIM Belgrade, 1 February, 1998

With the always necessary caution which is necessary when his statements are concerned, this time one should believe the Serbian prime minister Mirko Marjanovic that his government would do everything possible to avoid devaluation of the dinar. It seems that this time he was even quite sincere when on the top of the list of reasons for rejection of the devaluation of the national currency he put the assessment that in the case of floating, declining exchange rate of the dinar, inflow of foreign capital would stop and that privatisation planned for this year would immediately be doomed. It is a completely different matter that prime minister Marjanovic in his speech in Leskovac (on 29 January), which was announced in state media as the presentation of the platform, failed to present distinct measures of economic policy which would indeed "restore price and currency stability, re-establish order in economic conditions and prevent chaos".

First of all, one should consider the basic causes of the sudden decline of the value of the dinar in January this year, during which the last year's comparatively stable exchange rate between the German mark and the dinar of one for 4.2, rapidly started to change at the expense of the domestic currency and exceeded on 28 January the ratio of 1 to 6 (compare with the official fixed parity of 1 to 3.3 maintained for two years already). The general disruption of the official foreign currency exchange rate was explained by the economists in the end of last year by doubling of the quantity of dinars with no foundation, the deficit of the current payment balance with foreign countries in 1997 which reached about 1,300 million dollars, and by excessive public expenditures which amounted to about 55 per cent of the social product. But, it is interesting to analyse the immediate causes of the January collapse of the dinar which at least to a certain extent resisted the mentioned general pressure.

In the group of political reasons which always directly cause inflation, and therefore, the increase of the price of foreign currency, is the dash of even the last hopes that the American "outer wall of the sanctions" would be loosened and the fear that war will start in Kosovo (which is mutually conditioned). There is also, of course, the fact that none of the governments in FR Yugoslavia is stable. In Serbia, it is not clear who Marjanovic (that is, the Left) will have to share power with and how much that will cost him and his mentors (because obviously ordinary people do not have a high opinion about the opposition either). In Montenegro, the "transitional government" has not been established yet, and expectations that real power, following Milosevic, will start moving to the Yugoslav level - the federal government, were disrupted by the outcome of Montenegrin presidential elections. It turned out that we have started the new year without a single institution which would at least formally stand between informal centres of power and the state cashbox, so the people started to panic.

In the same group of economic-political reasons of the January currency chaos belongs the fact that the Serbian political leadership believed that the inflationary redistribution of foreign currency reserves of the population would be efficiently used by the sound economic lobby to which it had allegedly allocated only about 300 million German marks of foreign currency loans, out of which hardly anything has been returned (according to evaluations, only 50 million marks). In fact, from the money received last year for the sold Telecom, much more was actually distributed at the outdated official foreign currency rate via the foreign currency market - more than 700 million marks, and the returned dinars were not "annulled" but distributed through the pension fund which is in a hopeless deficit. The part of exporting economy which should have returned the foreign currency loans enormously increased the demand for foreign currency on the black market, but unfortunately for the Marjanovic's government, this market reacted instantly, so that the state banks and the socially-owned enterprises could not maintain the favourable purchase rate of unregistered remittance from abroad in the black market - without at the same time accelerating the primary issue of dinars in the direction of superinflation. The sharp speech of prime minister Marjanovic, with threats to "foreign currency speculators" is the result of his feeling that the government of Serbia will not be able to manipulate the street foreign currency (black) market in which it (along with the Montenegrin government) has in the past six years collected most of the mysterious transfer from abroad amounting to 11.5 billion dollars (according to the evaluations of Professor Dr. Ljubomir Madzar). Nowadays, the state foreign currency reserves have melted, the remaining resources are still blocked abroad, social foreign currency capital has started to flee abroad again, and the inflow through informal workers' remittances from abroad is receiived by the underground which has become independent.

The data of the payment operation service - that last year the population received 72.6 billion dinars, and that it spent only 47.7 billion dinars through legal money flows - points out to the conclusion that the grey economy has at its disposal significant liquid assets in dinars which, expressed in foreign currency, amount to more than 5 billion marks. Since there is no savings in banks, by simple logic it can be assumed that last year's "difference" between income and expenditures theoretically amounts to 9 billion dinars, and this is almost two times more than the last year's budget of Serbia. Just as politics has abandoned the political institutions, money has abandoned monetary institutions - so that the uncontrolled power is now biting its own tail.

To make the misfortune for Marjanovic's government even worse, in parralel with the loss of cheap control of the black foreign currency market, the so-called "price stability" was lost, of course, despite the attempts of the National Bank of Yugoslavia to prevent by various monetary measures the outflow of all these uncontrolled dinars in to the street, that is those which happened to be in the hands of the holders and which were not planned to be converted into foreign currency. After the superinflationary catastrophe in 1993, all the monetary players were highly qualitified to recognize a monetary assault at the domestic currency caused by the state itself.

Price instability and January monetary chaos finally threatened the last chance of the Left in power to creep through this year even with partly disrupted power - that is, to achieve two goals by controlled and directed privatisation. To present itself as a "reformist political power", the only longterm partner of the international community, and by selling big infrastructure systems, to ensure between 1.5 and 2 billion fresh dollars, as much as it is necessary to get hold of in order to enable the basic state functions to survive, at least the electric-power industry and transportation. That is why prime minister Mirko Marjanovic lay the stress on this threat in Leskovac.

It seems, however, that things have definitely got out of hand, which is best testified by disappearance of domestic cigarettes from tobacconists', and edible oil and detergents from stores. Despite the hundred times verified experience that these goods cannot be returned to stores by any strict government, Marjanovic announces that he will treat the chaos by ancient methods of socialist economy: by freezing or other forms of control of prices; by administrative control of money, banks and enterprises; by propagandist actions against merchants and speculators, etc; and since the goods "trampled down" by street devaluation demand rise of prices, the Socialists assessed that this time inflation is not working in their favour.

Seductiveness of the old illusion that by means of political force it is possible to create the economic perpetum mobile lies in the fact that such state actions yield certain results in a short term. Thanks to the latest one, the decline of the exchange rate of the dinar has been interrupted for a moment, and the dinar might even slightly recover for the next few weeks - until the new Serbian government is formed. After that, everything will start in the logical direction - downwards. But, and that might be the point of the whole affair - Serbian Socialists will not be blamed for it any more.

Dimitrije Boarov

(AIM)