Dramatic state of the Serbian economy

It 'ate itself'

Ratomir Petkovic

THU, 13 JUL 2000

Belgrade, June 29 - The May inflation of 5.2 percent, the registered 0.5 percent decline of salaries in that same month, as well as the price jump of the consumer's basket to 5 thousand dinars, which now costs 2.5 average, have further deteriorated the living standards of citizens. Economic experts also warn of the problems with foreign-trade operations which in the first five months of this year have registered a deficit of approximately one billion dollars.

And while the authorities brag every day about the reconstruction of bridges, construction of flats and investments in infrastructure facilities, citizens are panic stricken because of the evident decline of the living standards. According to the official statistical data the May inflation has reached 5.2 percent, while in that same month salaries dropped by 0.5 percent, in nominal terms. The price of consumer's basket with basic foodstuffs, has reached the amount of 4,950 dinars. In order to meet these expenses a citizen needs 2.5 average salaries.

Such developments in the economy have caused the concern of the "state" trade unions which responded to these development with a demand for halting the fall of the living standards because, even without this latest deterioration, it has already reached the lowest tolerability level.

At one time, Slobodan Milosevic informed the public that the growth of salaries would depend on the increase of production, but in practice the statistics register two-digit growth rate of production while wages are going down. Therefore, the analysts of economic trends have come to the conclusion that there are some priorities which are obviously more important than the increase of the living standards.

The latest assessments of the Economic Institute are rather grim in regard to the expected economic developments in the coming months. Such forecasts rely on dramatic conditions under which the Serbian economy operates. On the one hand, it is faced with enormous outlays for the financing of general public expenditures, and on the other, by limited development possibilities. In addition to domestic constraints, which are reflected in excessive indebtedness, there are also external reasons, primarily the sanctions which the Serbian firms are exposed to.

Poor exports have resulted in a record deficit in the economic exchange with the world. In the first five months of this year it amounted to US$ 970 million. Limited payment possibilities have left the economy without basic raw materials, such as natural gas, as the previously imported quantities have not been paid yet so that as of June 1, the Russian partner suspended further deliveries. The Yugoslav debt for the imported Russian gas amounts to US $ 302 million. Within the next 15 days, Toplica Nedeljkovic, Director of "Gas Prom Trade", joint Yugoslav-Russian firm, expects to receive a reply of the Russian supplier regarding further exports of gas to Yugoslavia. "If we were to pay just a portion of the debt, then we could expect a positive answer", thinks this economist.

Similar is the situation with other raw materials and intermediaries, without which the economy cannot develop, which is why it is in constant recession for the last two years, i.e. since mid 1998.

This is how the Serbian economy is making debts all over the world and in the country, while its lagging behind in development makes it less and less capable of honouring them. The Yugoslav debts annually increase by additional US$ 900 million on account of interest, so that irrespective of the fact that it is unable to incur new debts, Yugoslavia ranks high among 24 most indebted countries of the world.

In the first five months, the economy exported US$ 656 million worth goods, which is 30 percent below the three-year average recorded in the 1995-1998 period. During these same five months, the Yugoslav imports amounted to US$ 1.5 billion, which is 20 percent less than that recorded in the mentioned three-year period. As a result of such unfavourable foreign-trade ratio, which significantly affects the domestic production, analysts of the Economic Institute have submitted a proposal to macro-economic policy makers, i.e. the Federal Government as its official author, to re-examine this year's economic policy with a view to halting unfavourable economic developments.

The key reasons for the demonstrated pessimism of economic experts lie in the rapidly growing inflation, because, lacking healthy capital, the economy is forced to ensure funds through price hikes. As far as the inflation is concerned, May was this year's record month and the data available to date indicate that June price increase will not be much different, i.e. somewhere around 5 percent. The economy is also burdened by increased outlays for reconstruction purposes.

It required to prove its patriotism by making donations but, on the other hand, is unable to meet its tax obligations. It has already been publicised that the last year's federal budget was replenished up to only 75 percent of the projected level.

There is an increasing number of firms which look for a way out in price rises. Estimates indicate that the inflation is entering its critical stage which can easily get out of the established administrative control. Prices of products, which are not under control, grow at a much quicker rate than the controlled ones, which is why the experts have named this phenomena a "suppressed inflation" because those responsible for economic development are turning a blind eye to this fact. It's a small step from the current silent inflation to the price explosion. Incidentally, according to the adopted economic policy, the Government of Serbia has anticipated that there will be no inflation this year.

The economists are under the influence of different conditions, because in face of rising inflation their business moves represent a great risk. In contrast to prices, which are growing at a monthly rate of five percent, according to the Economic Institute projections, during summer months (June, July, August) the inflation will register a moderate increase of 0.2 to 0.7 percent per month.

A millstone around the economy's neck is also internal indebtedness which has reached 150 billion dinars. The authorities have been dealing with this problem for a long time, but only verbally, not doing anything to find a way out of this debtor-creditor relationship. Dramatic warnings of economists and bankers that consolidation of the banking and economic system is impossible without prior resolution of relations between debtors and creditors, were of no use.

The economy owes banks some 65 billion dinars, out of which 19 billion have fallen due. The bankers are well aware that they will have to write-off a debt worth 11.7 billion, but that is not the final amount, because it is practically a mystery how much is the economy in position to honour its dues to the banks. Individual banks have proposed the collection of outstanding debts with the property of indebted firms. In case this idea is implemented in practice, the banks would become owners of the property of their founders. In this way, the economy will "eat itself", because debts of individual firms have reached the value which is equal to that of their property, and even more.

Original article