The Elections Bring Inflation

AIM Zagreb, 30 September, 1999

Many people in Croatia nowadays believe that together with the elections the moment is approaching when stability of the Croatian kuna will finally burn up in flames of a new tide of inflation. This would be the logical end of several-year long economic policy which relied solely on high loans borrowed abroad, but also on unpaid debts which is a specific form of borrowing within the country. If it had not been for that as the known Croatian economistsand banker Dr. Guste Santini says, inflation would have amounted to more than 40 per cent a month.

The previous tide of inflation was interrupted way back in October 1993, prior to which prices were going up at the rate of about 35 per cent a month. By then, through various methods - among which "cooperation" with street foreign currency traders was not the least important - the authorities had collected sufficient foreign currency reserves to enable it to proclaim internal convertibility. After that prevention of inflation was just a technical problem solved according to a known recipe tested in former Yugoslavia at the time of the government of Ante Markovic. But already at the time economists were warnning that the real job of checking inflation was yet to be done. They claimed that nobody in the world had been able to interrupt inflation for good without reducing state expenditure. The so-called "second phase of stabilisation" was also expected, in which the economy should have been enabled to quickly increase production and begin re-conquering the market it had lost.

Nothing of that has ever happened in Croatia. Instead to reinforce enterprises, the regime was systematically destroying them by having enabled plundering privatisation and uncontrolled import of all kinds of items. At the same time, the state failed to reduce expenditure, moreover constantly increased it. That is how the budget from the figure of 24 billion kunas in 1994, the first year without inflation, reached 50 billion this year.

Nevertheless, in the course of six years, inflation has remained low. Prices have gone up by only 2 to 3.5 per cent a year, and only in August this year the increase of prices reached 5 per cent. What made this possible? The fact that excessive expenditure was not settled by money issue but by foreign loans. During five years, from 1994 until 1998, Croatia' foreign debt increased from 2.5 to 9 billion dollars. Per capita, Croatia is nowadays indebted twice as much as Russia which is considered to be the example of a country heavily encumbered with debts. And while every Russian citizen on the average owes about one thousand, every Croatian citizen owes two thousand dollars. Literally none of all that money has been spent on reconstruction of the old and development of new production facilities which would pay back the loans in the future. Everything has gone into consumption; at the most into construction of highways which on the eve of the forthcoming parliamentary elections HDZ is bragging about almost every day.

Foreign loans were also used for supplementing foreign currency reserves, so it seemed that everything was perfectly in order. Inflation has remained low and the exchange rate of kuna stable. A few lonely voices have warned that it was not good to go on endlessly taking new loans and that the country was becoming increasingly dependent on foreign creditors, in other words that it was losing economic and therefrom political sovereignty which the ruling nationalistic movement of president Franjo Tudjman was incessantly swearing by. Some of them reminded of the so-called Brzezinski's doctrine from the seventies named after the advisor of the former American president Carter. This gentleman claimed that it was possible to destroy communist countries, former Yugoslavia inclusive, by stimulating their inclination towards excessive consumption. This was done in one way only: by extending them abundant loans. Then all that one needed to do was to turn off the inflow of money which in the beginning of the eighties brought recession to Yugoslavia and shortages of all kinds of things - from fuel and detergent, to milk and toilet paper.

In Croatia production also started to go down as soon as the inflow of foreign money diminished. This year it will go down by two per cent and even without that it is still by 20 per cent lower than what it used to be. The Croatian union of employees explains this by very high taxes, interest rates, unpaid bills and growing corruption; briefly, excessive burden on their backs. All that had been there before, but problems became burning only after foreign loans had ceased to arrive. The country operated solely thanks to the fact that the country was increasing its debt every year, each time by a larger sum of money, last year by 2 billion, the year before that and the one before it by 1.5 billion dollars each... But, now foreign countries have ceased being so generous, so that it has suddenly become very complicated to get a single dollar of a new loan. In this year, the Croatian foreign debt increased by only 400 million, which is five times less than in 1998.

For the time being, this was sufficient to preserve foreign currency reserves, but not to finance excessive consumption. In the beginning of the year, in a dramatic television address to the nation, Croatian president Franjo Tudjman admitted that 12 out of every 100 kunas spent in the country are missing. He also announced careful management and reduction of consumption, but nobody took that seriously; least of all his HDZ which decided to literally buy as many votes as possible with the money from the state budget, of course. That is how 250 thousand public officials got higher salaries, although the gross domestic product is going down, payment of pensions "in accordance" with the living expenses has been accelerated (they are now arriving just a few days less late than in the prior months) and president Tudjman is publicly bragging that he personally demanded that the government abolish the tax on bread, milk, books and drugs.

But there is no money in the budget for all that. Simultaneously with running dry of foreign loans, it became difficult to collect taxes which is inevitable when production is going down and unemployment and poverty are growing. As far as it is possible to find out (this is a fact that is quickly becoming obsolete) the budget is short of one billion marks, despite quick sale of public enterprises. The economy lacks even more money. About 23 billion kunas (almost 6 billion marks) worth of bills have not been paid and almost 170 thousand employees have not received any salary for months. According to the estimate of the trade union, employees owe the workers at least five billion kunas or almost 1.3 billion marks. That the population has no money either is best seen in retail trade in which the turnover is by 4.5 per cent lower than last year. When 5 per cent of inflation is added to this, it turns out that expenditure of the citizens has been reduced by 9.5 per cent.

A few days ago prime minister Zlatko Matesa for the first time admitted in the state Assembly that the international community was applying a method of "silent sanctions" towards Croatia. He said this in answer to a deputy's question on the (lack of) cooperation with the Hague Tribunal, but there were few other reasons too: from the unsatisfactory position of democracy and freedom of the media (especially television), preservation of the results of ethnic cleansing by preventing Serb refugees from returning, to aspirations to parts of Bosnia & Herzegovina. The ruling HDZ has tried a few times already to change its spots. Now, however, the international community is asking it to do the impossible: to change its nature.

That is why many believe that inflation is inevitable, but that the regime will issue money just a month or two prior to the elections which are expected to take place around the New Year's Day. Therefore, the explosion of prices would be the problem of the new government which, all things considered, will be constituted by the opposition. But, cynics claim, inflation is the only solution for the opposition, too. It will invalidate consumers' rights which HDZ was very generously giving, and at the same time it will be the quickest and the simplest way to levy taxes on everything in this country and thus enable paying back of enormous debts the former HDZ has made.

Many respectable ecomnomists warn that inflation affects the poor population the most and that therefore the bill has to be paid by other, primarily the excessive state consumption. In order to avoid the possibility of return of inflation, respectable Dr. Zeljko Rohatinski proposes even giving up of monetary independence and introduction of the German mark as the parallel currency in local trade. After that both marks and kunas would be replaced by euro. "This would mean that we have burnt all the bridges behind us and accepted European rules of behavior", he says. Croatia is, however, still on a different track and on a different bridge.

MILAN GAVROVIC

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