SERBIA: FORCED PRIVATISATION

Serbia between economic crisis and political ambitions

As economic difficulties multiply, Milosevic's political centre is less and less averse to privatisation of the economy, especially by foreign investors.

AIM, PODGORICA, December 23, 1998

(From AIM correspondent from Belgrade)

The infallible indicator of the economic situation in FRY, the black market foreign exchange rate, seriously fluctuated at the end of 1998 thus showing that the new economic crisis cannot be masked by optimistic planning of better prospects for the coming 1999. The fact that in the seven months since spring devaluation of the dinar by as much as 83 percent, the real commercial exchange rate of the national currency has exceeded the official fixed parity relative to the West European currencies by 30 percent - is evidence in itself that the Yugoslav economic situation is going downhill. Bearing in mind the fact that the foreign exchange reserves of the National Bank of Yugoslavia officially amount to something below USD 400 million, and according to experts to less than USD 200 million, no special explanations of the current fluctuation of the black market dinar exchange rate for the German mark are necessary.

Since that is the value of the country's one-month exports and practically equal to the average monthly foreign trade deficit, it can be said that FRY is on the verge of foreign exchange collapse, i.e. just one step from a new economic disaster - profound stagnation of the production, severe energy shortage and short supply of all consumer goods.

Despite such circumstances, or perhaps precisely on account of them, Slobodan Milosevic, the FRY President, has both as regards rhetorics and tactics, returned to the policy of confrontation with the international community regarding the Kosovo problem and at the same time, by means of a veritable "offensive of megalomaniac planning", tried to assure the Yugoslav public that better times are ahead of us. Despite economic isolation re-imposed by the European Union, for the next year the Yugoslav planners have envisaged a 7 percent growth rate of social product in order to make all other projections look attainable.

A series of indicators of the growth of social product from 1994 to date demonstrate best how unrealistic the set targets are. In that first year of "super dinar" the social product (from a low basis in disastrous 1993) grew by 6.5 percent, and increased by only 3.8 percent in 1995. After the relaxation of international sanctions it increased in 1996 by 5.8 percent and continued to grow in 1997 by 7 percent. After that the pace of recovery radically slowed down in this year so that the growth rate fell to 4 percent. Is there any reason to expect accelerated growth rate of the Yugoslav economy in the next year considering the average recorded in several previous years?

There is simply no reason to expect "better times", except for some hope that the accelerated privatisation of the Yugoslav economy, primarily its sale to foreign strategic partners, could attract enormous amounts of foreign exchange needed for accelerated domestic production. Milosevic probably remembers well 1997 when he was saved by the sale of one half of "Telekom" for USD 1 billion. It seems now that free from all his previous ideological reservations regarding privatisation in general, and particularly regarding the sale of domestic industry to foreigners, he has sent different signals indicating his readiness to continue the sale of key enterprises.

This is further unmistakably corroborated by the hurried sale of the Beocin Cement Factory to the French and British for some 350 million DEM, a loan in the same amount which was raised from the Swedish firm "Erickson" (through the Serbian Prime Minister Marjanovic's firm "Progres" and in the name of the "Karic Brothers Company"), as well as a conspicuous announcement that the Pancevo "Petrochemical Industry" has been evaluated at approximately one billion German marks and will soon be ready to offer its shares for sale at the London Capital Market. In all this Milosevic obviously counts on major European companies which have some problems with marketing and development (like "Erickson"), to intervene with their authorities so as to ensure "individual" violations of the European ban on investments in Yugoslavia, and thus secure key sectors (petrochemical industry) on the local market on time and at an acceptable price or the transfer of plants which are ecologically unacceptable in their countries (as in case of cement factories and even basic chemistry) to Yugoslavia.

The problem of securing foreign capital is obviously urgent because it is certain that the state can no longer survive by exploiting agriculture and restraining the military budget which from some USD 750 million in 1994 has grown to USD 1.4 billion for 1999. Namely, the fact that Milosevic has increased the federal budget at the exepense of the Serbian one (total effect - over USD 200 million) when he moved from the Serbian to the Yugoslav level, shows not only that the direct monetary control follows his movements, but also that the situation in the Army of Yugoslavia has deteriorated so much that something had to be urgently done so as to rectify its economic standing. The more so as during the summer rebellion in Kosovo Milosevic realized that the Serbian militia was unable to fully replace the Yugoslav Army forces, especially not on borders. And, perhaps not even in some possible future showdown in Montenegro.

And it was because of such shifting of the state consumption that the "planning of better future" was necessary. It is interesting to note that, taking into account the sum of annual budgets of approximately USD 4 billion, the real level of government spending in Yugoslavia has not changed for quite some time, but that it is, nevertheless, increasingly unbearable for the economy (despite the statistical growth of the social product). This points to the fact that the losses of the Yugoslav economy have grown year after year, or better said that it is becoming so hard and expensive for the economy to secure production so that not even high rates of physical growth can save it from ruin. The technological lagging behind in the course of the last ten years, caused by political and economic-systemic factors, is evidently much deeper than global indicators can show.

Such structural preservation of the economy, which Serbia has gone through in the past decade under the Socialist rule, has a paradoxical result - the strategy of isolation from the world has asserted itself as the only possible solution for the survival of the political super-structure, although that same isolation is the cause of economic ruin. Since such strategy demands constant "political fuelling" so that each new cycle of the crisis can be extinguished with increased political oppression and propaganda - regimes of this type are soon faced with the problem of securing foreign capital necessary for the supply of basic goods for the population so that without social explosion it can endure the cumulative effect of economic and political pressures.

There lies the answer to the question why, parallel to the tightening of the Kosovo knot, Milosevic is offering world entrepreneurs a possibility to invest in Yugoslavia. The tactics of selling the most successful Yugoslav enterprises to foreigners is not bad and economically unjustified in itself, especially when it is inevitable and forced. However, there is a delicate question whether the main sector of the Yugoslav economy - agriculture - can be now saved by privatisation of agricultural combines. Perhaps that is why KPMG, one of the largest, most professional and discreet world firms specializing in transformation, has been entrusted with the planning of the sale of national plots and agro-industrial complex. In that context, it has concluded a number of contracts and preliminary contracts in Vojvodina, while only the one with PIK Becej has been partially disclosed to the public.

Privatisation of large state-owned agricultural estates would be welcome in principle, primarily because it implies that the trade in food products will break free from the "chains" of economic policy. However, it is obvious that Milosevic and his coalition would much rather sell the industry than alienate a national resource of such "vital importance" - the arable land. In any case, that is the only way for them to keep domestic food prices at a relatively low level as they directly influence the basic mood of impoverished population. Consequently, all calculations about the continuation of an ambitious policy of "preserving independence and territorial integrity" are linked to the outcome of attempts at selling the largest possible share of the national economy. However, if the economic isolation of Serbia by the West increases and the ban on investments in Yugoslavia is consistently applied, the local regime will radically force the population to tighten the belt even more and agree to even more subservient cooperation with the East.

Dimitrije Boarov

(AIM)