Montenegro and Devaluation of Dinar

Resort to New Currency

Is the rumour about approaching devaluation of the dinar an introduction to creation of a new Montenegrin currency

AIM Podgorica, 30 July, 1999

Announced for weeks, the decision of the government of FR Yugoslavia on devaluation of the dinar has been postponed after it had failed to reach an agreement with the National Bank of Yugoslavia (NBJ) on a new official exchange rate. That is why, according to the local daily press which relies mostly on unidentified sources from the top of the federal administration, president of FRY Slobodan Milosevic himself will decide when and how much the Yugoslav dinar will be devalued.

But, regardless of the administrative decision, the headlong fall of the dinar on the black market continues. Dealers in the streets of Podgorica are already purchasing foreign currency at the exchange rate double the value of the official one (6 dinars per 1 DEM) and they offer 100 DEM to possible buyers at the price of 1,300 dinars. Despite the fact that in Serbia both prices and salaries were "put on ice" on the first day of NATO bombing, the total money in circulation in FRY increased during the war from 11 to 13 billion dinars. This tendency continues, so that according to the estimates of economic experts, FRY has already ben struck by a new tide of inflation, although for the time being its intensity can still be controlled - it amounts to 7 to 15 per cent a month.

Threats of possible superinflation and obvious lack of consultations with the authorities in Podgorica when monetary policy of FRY is concerned offer new arguments to the growing number of advocates of introduction of a convertible Montenegrin currency. While Milosevic is trying to reconcile the irreconcilable - the increasing need of the regime for any money, even be it inflationary, and the obvious intention of Montenegrin authorities to interpret possible devaluation or growing inflation as banishment of this republic from the Serbo-Montenegrin (monetary) federation - in the south of FRY intensive preparations for monetary independence are going on.

How serious this intention is was confirmed by president of Montenegro Milo Djukanovic. Not long ago he declared in Vienna that the success of the planned reform in Montenegro depends greatly on the fact whether FRY, that is Montenegro, would have a convertible currency. He also said: "If Serbia fails to accept our offer for resolution of the question of monetary control, we will have to carry out the project of our own currency", Djukanovic stressed. His coalition partners, primarily president of the Social Democratic Party Zarko Rakcevic, even set the exact time Montenegro was ready to spend waiting for the agreement of Belgrade. According to them - the end of October is the ultimate deadline for reaching the agreement.

In the meantime, intensive work is going on in Podgorica to complete the "technical part of the job". "Montenegro is drafting legal documents necessary for introduction of its own - convertible currency founded on a monetary board", declared to the Finnacial Times Steve Henke, professor of applied economy and international expert when currency boards are concerned and since recently the economic advisor of Montenegrin president. Henke confirmed that he was taking part in drafting documents which would be the foundation for introduction of an independent Montenegrin currency.

At the same time, unofficial reassurances are arriving from the top of Montenegrin administration that the job of rounding off the finnacial construction, completion of decrees and laws which would regulate introduction of a new currency and legalise the use of a parallel currency (German mark), payment of customs, tax system... has been finished! According to these information, Montenegro would begin the project of its own currency with 100-120 million marks provided by Montenegrin government with some help from abroad. Besides, it is estimated that after the beginning of this project, additional 150-250 million marks would be engaged in legal monetary flows, which are at this moment according to the assessment of Montenegrin economic experts in the sphere of grey economy or kept at home by the citizens.

The regime is also offering an explanation for the dilemma whether the almost completely ruined and impoverished Montenegro has the possibility to introduce and then preserve a convertible currency? Doubt is corroborated by statistical data according to which the foreign trade deficit of Montenegro only in the first five months of this year amounted to 105 million dollars (and in the course of 1998, no less than 206 million dollars). Nevertheless, assurances are arriving from Montenegrin regime that "the reality significantly differs from statistics". According to it, actual export of Montenegrin economy is several times higher than what is registered. This is true for a a very banal reason which reflects very well the nature of current inter-republican relations in the "modern federation". Montenegrin enterprises, following instructions of the Republican authorities, evade paying the federal registration tax. That is why this export does not appear even in the official federal statistics which is done on the basis of data sent from Belgrade.

All things considered, truthfulness of this allegations will comparatively soon be justifiable - as soon as Montenegrin convertible currency comes to life, regardless of whether Podgorica will start this business within the federal monetary system which is nowadays less probable, or on its own. According to what has been made public so far, a monetary board would take care of convertibility of the new currency (names "perper" and "convertible dinar - KOD" have been circulating). It would be controlled by a management board consisting of five directors. Three members of the management board would be nominated by the IMF (but they would not be employees of IMF or its member states), and the remaining two members would be nominated by the government of Montenegro... The central bank would operate under full supervision of this body, and parity of the new and the foreign currency in reserve (the German mark) would be unchangeable, determined by law passed by the Republican assembly.

This idea met with strong disapproval, of course, especially in Serbia. The opponents of Montenegrin convertible currency mostly believe that it would question the survival of the joint federation. "A separate currency would interrupt payment operations between the two republics overnight and impose urgent proclamation of Montenegrin sovereignty", claims Nebojsa Medojevic, member of economic Group17. His colleague Mladjan Dinkic shares this opinion and says that "Montenegro should not provoke the regime in Serbia with a new currency..."

Is its own currency in fact a "shortcut" via which Montenegrin authorities would like to lead this republic out of the Serbia-Montenegrin community without the advocated referendum? The answer to this question was offered by professor Veselin Vukotic, also member of the Group 17 and author of the economic platform offered by Montenegrin administration to Belgrade as a foundation for redefining relations in FRY. In the latest issue of Monitor weekly, Vukotic says:

"Introduction of a single convertible currency, the attempt to create conditions for more efficient work and higher quality living, convertibility which in itself integrates all that should be accused of breaking the community, and the feeble dinar which cannot be the foundation of any reform, this sickly currency should be proclaimed the savior of the community. There is hardly anywhere else in the world so much petty politicking and so much corruption".

Vukotic, nevertheless, believes that convertibility in itself is not a sign of statehood: "Convertibility belongs in the category of human rights! Just like franchise! Is not my freedom endangered by the weak currency? Let us remember the year 1993. Were we free then; did not we spend time rushing between dealers to get the best possible exchange rate?"

This brings Vukotic, if politics is disregarded, to the major dilemma - how would introduction of a new, completely convertible currency reflect on the present, more than low standard of living of the citizens of Montenegro? Do they have sufficient reserves to survive the reform and live to see the promised "better life". It seems that the increasing reminders of 1993 and the fear of superinflation which at the time reached 352 billion per cent in FRY (ranking second in history) are preventing the citizens of Montenegro to raise the question of the social price of the planned monetary reform. Indeed, there is no doubt: everything except the war is better than what the citizens of Montenegro and Serbia experienced at the time.

Zoran Radulovic

(AIM)