Growing confusion in economic activities

Six foreign exchange rates

Ratomir Petkovic

MON, 26 JUN 2000

Belgrade, June 2, 2000 - As usual, the authorities are describing current catastrophic results of economic operations as a success, comparing them with the period when because of the bombing, the production was literally halted. The regime is most worried by 10 percent April fall of production as compared to March, which is why the Federal Government adopted a number of new measures thereby creating confusion by allowing the application of six different foreign exchange rates on the market. This makes the possibilities for speculation even greater.

As of late, it has become evident that coalition partner who are in power in Serbia, describe the economic situation in their Republic differently. And while the new SPS spokesman , Nikola Sainovic emphasised that the production was increased by 48 percent in April compared to that same month last year, the Radical Party assessed economic and social situation as very difficult. It is obvious that these parties have chosen different strategies in their public relations in the electoral year for local and federal authorities.

The Socialists are trying to picture the reconstruction of the country in the context of economic prosperity comparing its current results with those achieved at the time of bombing. The progress is evident, but the comparison out of place because it doesn't give a true picture of the state of national economy which is like a poor guy falling from the tenth floor who is reporting from the second floor that nothing bad has happened to him yet.

That the fall can be very painful is confirmed by the latest moves of the Federal Government, which by these measures made it known that its economic policy for this year has become irrelevant already after five months. Economic trends have taken a turn for the worse, especially in the production and foreign trade sectors. According to the data of the Economic Institute, the production decreased by 10 percent in April compared to March. This was an alarming sign all the more as a 720 million dollars foreign trade deficit was recorded in the first four months this year. This amount is by two thirds higher than that recorded in previous years. For the time being, it is unknown how this deficit is being covered. Whether by increased indebtedness or by payment from sources unknown to the public.

Drastic state of economic activities is best confirmed by the decision of the Federal Customs Administration which, not waiting for the reactions of the Federal Government, decided to introduce a new customs rate of exchange according to which 1 DM is worth 19 dinars. This step, initiated from a competent place, was soon changed by a decision of the Federal Government on setting the customs rate of exchange by way of multiplying the official exchange rate (six dinars to a German Mark) by 2.33, so that customs duties are paid at the rate of 14 dinars per 1 DM. This rate is applied on consumers goods, while for intermediate goods the previous one, i.e. official rate still applies.

Making this move, the Federal Government wanted to achieve two goals. First, to reduce the imports of consumer goods, which is the reason of such high deficit in foreign commodity exchange, and second to keep import costs of oil, raw materials and intermediary goods unchanged and thus avoid the growth of inflation. Since each inconsistent step in the economic policy has its two sides, the latest one made by the federal administration also had its negative effects.

A veritable mess of dinar exchange rates has been created, as there are currently six different exchange rates. The official one, according to which 1 DM is worth six dinars, then the black market rate (23 dinars), the accounting rate (29 dinars), customs rate (14 dinars), black market exchange rate for oil (25 dinars) and the one applied for the dinar repayment of household foreign exchange deposits (20 dinars). The Federal Government gave its contribution to an even greater confusion, but also created possibilities for versatile speculations. This situation is most favourable for business circles which are "connected" with the decision-making people. Even President of the Radical Party, who has been persistently trying to discipline the republican apparatus and individual public enterprises, criticised the existing practice. This only goes to prove that coalition partners have formed an "alliance" with third parties, but also that there exists a kind of competition in trenches between them.

For the time being, the exchange rate applied to free-of-charge shares subscribed to workers (DM 400 for each year of employment),has remained unchanged. In this case, the German Mark is worth six dinars because of which the workers are severely damaged, especially having in mind the growth of inflation which is why a new rise of the grey market rate can be expected. The official statistics have proved unreliable for the calculation of the monthly price rise, because they recognise the fixed prices and not the ones prevailing on the market. That happened with the gasoline, which was for months calculated at a price at which it couldn't be bought. This "helped" the statistical experts show the annual inflation rate as much lower than the actual one. Nevertheless, with five months delay, the "error" was rectified so that the last year's inflation rate jumped from previous 62 percent to 83 percent.

The economy is also in a hard situation because of the decision of the European Union to introduce a list of enterprises which firms from EU member countries cannot do business with. That is why the Yugoslav Government filed an official protest, while the only comfort left to businessmen is that they have earned that status because of their patriotism. However, the spiralling decline of production in April causes greater concern than any encouragement that commendations for patriotic behaviour can give.

The domestic economy lacks resources for re-starting the production cycle. Many firms have raised credits under unfavourable conditions waiting for better times. They never came, but the bank debts remained. Because of speculative interest rates, which reached as much as 15 percent per month, quite a number of enterprises were pushed to the wall. A deep debtor-creditor gap was created between the banks and the economy, which is the reason for conflicts that end up in courts. For the time being, debtors fare better because their liabilities towards banks are being deferred However, the Federal Government has announced a law according to which debtors would be obliged to repay their debts or risk confiscation of property.

Since Federal Parliament is practically not working, it is not known when will the law be adopted, but in any case, nothing good awaits debtors unless their lobby grows stronger in the meantime and manages to prevent the adoption of the mentioned regulation. The indebtedness is the ill that ails our economy. According to estimates it amounts to over 100 billion dinars. At one time, the Parliament of Serbia brought a decision on writing-off half of debts to everyone who meets its obligations to the republican budget, but very few debtors took advantage of this favourable possibility.

An appeal to other creditors to follow this example did not meet with understanding either. If the Law on Compulsory Debt Repayment is adopted, the banks will be able to make that long-planned step and become owners of the property of their debtors. At one time, Beobanka tried to collect its claims by taking over business premises of the "Beograd" Department Stores, but after a sharp warning of the employees this was prevented. The entire debtor-creditor knot remains entangled because the state authorities have no guts to disentangle it fearing social unrest, so that reforms in the economic sphere remain a dead letter. It is estimated that the authoritieswill remain rue to their hitherto practice, i.e. in the pre-election period they will no dare make radical moves irrespective of the fact that they have so loudly announced reforms. Thus, the catharsis of the Serbian economy is once again postponed.

Original article