Deepening Economic Crisis Announced

Red Hot Patriotism and Ice Cold Recession

In the shadow of post-Rambouillet manifestations of triumphant patriotism, economic paralysis is spreading around Serbia accompanied by rapid flight of capital from the country

AIM Podgorica, 27 February, 1999 (By AIM correspondent from Belgrade)

Accelerated decrease of the value of the dinar on black street market in the beginning of this year from 8 to over 9 dinars for one German mark, this time was not explained by Dusan Vlatkovic governor of the National Bank of Yugoslavia as the result of speculations, but as the decrease of the supply of foreign currency in the internal market due to the crisis in Kosovo and absence of foreign currency inflow. Even Dragan Tomic, vice prime minister of Serbia, this time said through clenched teeth that problems with foreign currency reserves were one of the causes of the value of the dinar going down. This is accompanied by a rapid decrease of foreign trade and consequently by general weakening of economic activity.

In fact, although none of the politicians and economic experts will say it publicly, all signs of a big flight of capital from Serbia are evident - due to which nobody has working capital here to try to do anything. Here is an illustration of this dangerous economic paralysis. The forecast of experts from the Economic Institute in Belgrade that in the first quarter of 1999 economic operation would generally and significantly slow down, was confirmed already in January by the decrease of industrial production by 23.8 per cent in comparison with the previous month, and by 9.6 in comparison with January last year. According to the same forecast of the Economic Institute, in the first three months of this year industrial production would go down by 13 per cent in relation to the previous quarter, and by 5 per cent in relation to the same period last year.

In favour of these forecasts on the forthcoming spreading of cold economic recession speak the data on the decrease of export in January by 40.4 per cent in relation to December last year and 25.7 per cent in comparison with January last year, as well as on the dangerous decrease of import by 13.4 per cent in relation to the previous month and by 41.4 per cent in comparison with the same month in 1998. As an indication of growing general economic depression, there are the news on exceptionally low level of short-term money transactions at Belgrade stock exchange. Nobody is lending money to anybody, nobody is trying to borrow any money either, although it was established in the end of January that mutual debts of enterprises exceeded 26 billion dinars and that 23,000 companies met all the requirements for bankruptcy (and they employ the total of 425 thousand employees).

In the course of last year already, FR Yugoslavia faced the stifling consequences of the crisis in Kosovo and the accompanying European isolation, especially in the second half of the year. In November, the index of industrial activity showed a decrease of production of 5.5 per cent and in December of 6.4 per cent, while respective comparisons, from April 1998, with the same months of the previous year showed a comparative decrease of productions which exceeded, in fact greatly exceeded, 20 per cent.

According to warnings of the centre of economic studies CES MECON in Belgrade, in the period between 1995 and 1997, economic activity increased at annual rate of about 6 per cent, in 1998 this rate dropped to 2.6 per cent, and in the second half of that year production dropped by 4 per cent in relation to the first. According to the opinion of this centre this is the result of preservation of the existing ownership structure and absence of transition. Pavle Petrovic, leading expert of CES MECON says that these figures show that the higher economic rates after implementation of Avramovic's program was not economic growth, in fact, because there was no increase of capital, since investments were lower than necessary for replacement of production means. This means that the higher production rates were just a reflection of partial recovery of the economy in which exploitation of facilities increased from previous about 35 per cent to about 45 per cent.

"The official economic policy seems to have succumbed to the delusion of economic growth", says Petrovic, "so it appears to me that we are continuing to lull ourselves that our economy, such as it is, is capable of developing and that time has not come yet for its profound reform. This drastic slowing down of production recorded lately is a signal of the possibility that this year economic growth might be altogether interrupted or that even total production growth might slightly decrease (depending on results of agriculture)".

All that leads to the conclusion that possibilities of recovery for Yugoslav economy have been used up on the very low level of exploitation of facilities and that a very difficult economic situation lies ahead which one should not wait for sitting on one's hands. That is why reforms should be initiated, say experts of CES Mecon in their presentation of the program of reform of the fiscal system of FRY. In this program, it is first established that there is a constant accumulation of the deficit of the fiscal system which has in the past four years reached the level of 12 per cent of the social product although the public revenue has reached 60 per cent of that product. The biggest debt is to pensioners (5 per cent of the social product), to the employees of non-economic activities (2 per cent), to users of public welfare (0.8 per cent), and so on.

The biggest debt - the one to pensioners - is the result of the fact that all current income of the pension fund can be covered only when pensions amount to 75 per cent of salaries, and pursuant the law, obligations are practically on the level of the average salary. The situation is further dramatised by the fact that the state did not manage to collect 11.2 billion dinars of taxes and contributions. But, while it is, on the one hand, possible to understand this because obligations to the state simply cannot be paid by those who make no income, on the other it is much harder to understand that tax and customs administration has not been able to collect import taxes paid for four everywhere in the world most profitable taxable products - coffee, cigarettes, alcoholic beverages and oil derivatives. Back in 1997, CES MECON calculated that out of the annual "fiscal capacity" of these four products amounting to 13.5 billion dinars, only 6 billion were collected or just 45 per cent of what was possible. This loss of state revenue of 8.5 per cent of the social product, if it had not occurred would have covered the biggest part of the deficit. That is why it is possible to say that about 7.5 billion dinars of uncollected excise duties which in 1997 amounted to almost two billion German marks, were robbed from pensioners, teachers and physicians, and distributed by the domestic (and foreign) mob, more or less in cooperation with the state administration.

Is the situation significantly better nowadays? It is difficutl to estimate. First, in order to undermine the material foundation of Djukanovic's leadership in Montenegro, Serbian regime took somewhat more resolute steps to cut the smuggling channels going via that republic, but there are still no evident signs that similar measures have been taken on all the other borders around Serbia. Indeed, continued delay in payments of pensions and salaries of employees in state educational and health institutions is a sign that little has imporved in this sense. In its project of reform of the fiscal system in this situation, CES MECON proposes the following: more efficient collection of taxes, contributions and excise duties, reduction of the legal commitment about the amount of pensions in comparison with salaries and rise of prices of oil derivatives, which would by raising the tax base bring increase of revenue of about 2 per cent of the social product. The outstanding debt would be covered by a certain type of securities which could be sold below their nominal value (for those who urgently need cash). The objective of these and other measures, according to the CES MECON program, would be to reduce the fiscal burden on the economy in a few coming years to the level of between 41 and 47 per cent of the social product (the lower the better).

Dimitrije Boarov

(AIM)