Devaluation of the Yugoslav Dinar

ROBBING CITIZENS OF FOREIGN CURRENCY

Announced as a measure which is supposed to support the adopted economic policy, devaluation was only a convincing sign that the Federal Government has abandoned the policy according to which no inflation was forecast for this year. Devaluation is also a confirmation that the regime has no intention of opening up to the world and that it has decided to collect the foreign currency its needs from the citizens instead of securing it through economic development and exports.

AIM, Belgrade, 2 April, 1998

With its latest devaluation, the Federal Government only continued the tradition of Cabinets from these parts, of disturbing the public with its decisions and making it laugh with the illogical explanations of such decisions. The 82 percent devaluation of the official dinar exchange rate and 18 percent of the black-market rate (six dinars for one German Mark), whereby the national currency lost its value, was declared only two months after the Serbian Prime Minister, Mirko Marjanovic stated "with full responsibility that there will be no devaluation". At a press conference, the Vice President of the then Government of Serbia, Slobodan Radulovic, also claimed that the black-market exchange rate would be cut to less than 4 dinars for one DEM.

After such irresponsible statements of the Serbian officials, the public here finally realized that it could not trust the highest state authorities and therefore dismissed the statement of the Federal Prime Minister, Radoje Kontic, that the devaluation would not cause price rise or market disruptions. Actually, the words of the Federal Prime Minister were denied at the same time he was uttering them because, guided by their previous experience, the citizens rushed to turn the worthless dinar into commodity reserves, mostly of foodstuffs: edible oil, sugar and flour.

The twenty third devaluation in the last 46 years caused worries as it opened the door to a new inflationary wave which has started already last November. From January to late March inflation rate exceeded 8 percent, so that according to estimates even without devaluation it would have reached 50 percent by the end of the year.

Kontic's claim that devaluation would not cause price distortions was unconvincing because that same night when the devaluation was declared, prices of energy fuels (petrol and gas) went up by 20 percent. Their new prices will be built into every single product and service. At the same time while Kontic was trying to convince the public at a press conference that prices would remain unchanged, shop keepers were closing their shops for stock-taking and putting up new price tags with higher dinar amounts.

Dusan Vlatkovic, Governor of the central bank, was also unconvincing when he claimed that money supply of 9.5 billion dinars had the foreign exchange coverage. The very fact that citizens will be able to buy from banks a limited amount of foreign exchange (500 DEM) is sufficient proof of the foundations on which the devaluation has been laid, wherefore the public is justifiably afraid that the next change of the exchange rate might follow very soon. And that will be result in a race between inflation and devaluation, similar to the infamous one in 1993, which people still remember with fear.

Although devaluation is justified by the intention to preserve this year's economic policy, it in fact is a recognition of its lack of realism. According to this policy the inflation would amount to zero this year, although the November price rise pointed to the inevitable price fluctuations. Also that is when the black-market exchange rate started to significantly deviate from the official one. The economic policy envisaged consumption at the level of 60 percent of the social product, while it now warns that it must be reduced to 50 percent. With a view to maintaining the effects of devaluation changes in the tax system were announced, although last June the Federal Government withdrew from parliamentary procedure the Bill on Tax Rates Harmonization between Serbia and Montenegro as two federal units were unable to agree and whereby practically two systems started operating in one state.

The decision of the Kontic's Cabinet to carry out devaluation showed that Serbia and Montenegro disagreed regarding the undertaking of this measure. While Kontic maintained that the agreement was reached, the Montenegrin Prime Minister, Filip Vujanovic, denied his claim by stating that Montenegro opposed devaluation, but had to give in as it was placed before an accomplished fact. The disturbed relations between leaderships of the two republics are not very promising as to the support the Federal Government should expect from them.

The true reasons of devaluation lie in the fact, which the Federal Government refuses to admit to and even less face. It is a consequence of depleted foreign exchange reserves: during last two years the commodity exchange deficit amounted to 4.6 billion USD and this year's projections mention the deficit of 3 billion dollars. There is no money to cover this difference, so that the Government resorted to restrictive measures the objective of which is to reduce imports on the one hand, and to increase exports, on the other.

As a result of the isolationist policy of the regime, Yugoslav economy is unable to get foreign credits for its development and is incapable of capital accumulation needed for financing increased production. With modest production it cannot make export breakthrough. The best example is industry of tractors which out of planned three thousand prepared only 42 tractors for exports to China with which Yugoslavia was supposed to pay for the Chinese oil.

Again on account of politics, the economy lost its export preferences at the European Union market, which for this year alone amount to 300 million USD. As a hostage of the politics, the Yugoslav economy is unable to develop with the resulting devaluation and the announced reduction of public expenditures which even in the current amount were not sufficient to meet the needs of education, health care, social benefits and pensions. The share of public expenditures in social product is high because of the low value of the overall output and not because of the high consumption. The economic policy has projected unrealistically high growth of the social product (10 percent), counting with the foreign financial assistance (at the time of its drafting), which did not materialize.

The most recent measures of the Federal Government, including devaluation, are only a sing of regime's intention of remaining closed to the world and keeping the country in deep isolation. This became clear when the new Serbian Cabinet of Socialists and Radicals was formed. The Government no longer has those directors, from the so called export lobby, who opposed devaluation and kept their firms alive thanks to their ministerial privileges, primarily by securing foreign exchange at unrealistic official rate. Economic analysts do not believe that the devaluation will achieve the desired effects. It is suspected that this unpopular economic measure is supported by 900 million DEM (value of three months exports), which should in the first place, be secured in the country's foreign exchange reserves.

The announcement of the National Bank of Yugoslavia that it will persevere in its restrictive monetary policy means an acute shortage of money for the economy. This is also indicated by the fact that after devaluation some firms sold their foreign currency at the rate of 5.2 dinars for one DEM in order to secure funds for workers' salaries. Citizens who have some foreign currency will soon find themselves in a similar position.

Since Yugoslavia is in total isolation, the only way the regime can get hold of the much needed foreign exchange is to take it at the home ground, because export orientation and development of the economy demand its opening to the world which could threaten its positions in the country. Just like every other devaluation, this one too meant the end of ones and the success "overnight" for others. Best fared those who aware of the pending devaluation, paid in advance customs duties applying the old exchange rate. In this way they saved 82 percent in customs duties and even more in sales taxes because of the lower tax base as these are paid in proportion to the amount of customs. On a 35,000 DEM worth car, one could save as much as 30 thousand dinars in customs and taxes.

Ratomir Petkovic

(AIM)