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South Slavic: October 10, 2002

10 October 2002, Volume 4, Number 34


Part I.

A recent broadcast of RFE/RL's Radio Most (Bridge) with Omer Karabeg; Mladjen Kovacevic, professor at Belgrade's Faculty of Economics; and Stojan Stamenkovic, research fellow at Belgrade's Institute of Economics and editor in chief of its journal, "Monthly Analysis and Prognosis."

RFE/RL: Mr. Kovacevic, do you find the present exchange rate of the dinar realistic?

Mladjen Kovacevic: I have been arguing for more than a year now that this exchange rate is unrealistic. As time goes by, that becomes increasingly clear.

The defenders of the present exchange rate claim that foreign currency is available in sufficient quantities that exceed demand. They add that the market should be left to fix its own exchange rate.

In principle, that is fine. But now we know that after November 2000, when the present exchange rate was fixed, prices rose some 20-30 percent that same year. Last year, they went up 40 percent, and during the past nine months this year, they probably rose some 10 percent. It is therefore obvious that the exchange rate must be recalculated.

Let us consult any encyclopedia and we will see that devaluation -- or correction of the exchange rate -- is necessary when the prices rise faster than in the countries that are one's most important trading partners. Otherwise, imports will grow and exports will remain at a very low level, which is exactly what is going on here.

Eventually, what we will have is a huge trade and payments deficit. And we already know that the last year's trade deficit was almost $3 billion. I do not advocate big devaluations. I prefer a gradual correction of the exchange rate.

However, if we continue this way, if [Yugoslav National Bank Governor Mladjan] Dinkic's [unwise] promise that the exchange rate will not be changed for the next 10 years is kept..., we will, unfortunately, face the situation of Iraq or Cuba where the exchange rate has not been changed for decades, which has had serious consequences. Or we will face the same situation as Argentina, which means that the Argentine tango will be danced here, too.

Stojan Stamenkovic: I find the comparison with Cuba or Iraq inappropriate, since what we have there is the administrative fixing of the exchange rate. Our exchange rate is fixed by neither the federal government nor the National Bank of Yugoslavia.

The National Bank of Yugoslavia, of course, does influence the exchange rate as a buyer or seller of foreign currency. The availability of foreign currency exceeds the demand, and this is why the hard-currency reserves grew from the beginning of the year until the end of July to some $650 million. If we add the $230 million in hard-currency reserves in the commercial banks, we have almost $900 million.

If the National Bank of Yugoslavia wanted to intervene in order to make the dinar cheaper and the euro more expensive, then it would have to buy more hard currency than it is doing now. That would probably help some exporters, maybe even slow down imports, but what would be the consequences?

Hard-currency reserves would grow. On the other hand, there would be no equivalent increase in goods to soak up the dinars that the National Bank of Yugoslavia would have had to issue. In such a situation, prices would rise sharply. The exporters who were supposed to be helped would soon find themselves back where they started.

Kovacevic: We keep referring to those hard-currency reserves, but we tend to forget that they grew because of assistance from abroad. Now, however, we get very little direct help, only credits.

The politicians go abroad for still more credits and argue that the interest rate is only 2 or 3 percent, that we will start to pay off the credits in three years, etc. However, nobody asks how we are going to pay for the credits if our exports do not start to grow. We will face huge problems once we start to pay off those credits in three or four years.

Furthermore, the governor of the National Bank of Yugoslavia and those who support him often argue that the exchange rate should not be changed because people are selling more hard currency than they are buying. I am deeply convinced that they are doing so simply because hardship...forces them to do it.

With that in mind, the question is whether we should really be proud of our increased hard-currency reserves, which, by the way, are quite modest compared to those of many other countries.

But if our deficit continues to grow and reaches $10 billion to $12 billion in 10 years, the hard currency will leave the country, regardless of whom it belongs to....

And 10 years from now, we will face the fate of Argentina. Let us not compare ourselves with Iraq or Cuba, but Argentina is certainly an instructive case for our situation.

Argentina also used to enjoy the support of the International Monetary Fund, which repeatedly praised its economic policy and fixed exchange rate. But when the crisis began and panic set in, when people started to withdraw their hard currency, Argentina had to make a massive devaluation of its national currency.

My colleague Stamenkovic claims that such a devaluation is not on the cards for us. But if we find ourselves in Argentina's situation, the exchange rate might have to be corrected to who knows what extent -- maybe 300 percent or more.

RFE/RL: Mr. Stamenkovic, do you find Governor Dinkic's claim that the exchange rate will not be changed for another 10 years to be nonsense, as Mr. Kovacevic said?

Stamenkovic: As I have already said, the exchange rate will be determined by supply and demand.

But let us turn to the matter of politicians obtaining credits abroad. I was quite irritated by some candidates in the Serbian presidential race charging that [Yugoslav Deputy Prime Minister Miroljub] Labus has saddled the country with debts.

The World Bank granted us a $550 million credit with a 10-year grace period that needs to be paid in 30 years. Those are the most favorable terms that are granted only to the poorest countries, mainly to central African states.

If we bear in mind that the dollar drops in value by some 2 percent a year..., then after 30 years, we will pay back some $ 110 million less, which amounts to a write-off.

Kovacevic: Governor Dinkic stresses that foreign investments will help us survive in the future. But let us not fool ourselves. That is exactly what was said when [former Governor Dragoslav] Avramovic's program was adopted [at the start of 1994]. Many predicted that investments would pour in, but I said such talk was based on illusions.

Stamenkovic: Those two things cannot be compared. Who could have seriously talked about investments when the country was under an embargo?

Kovacevic: Well, we have had no sanctions for two years now, but there have been only a few investments.

Stamenkovic: There is a big interest in investing here. But foreign investors are waiting to see how the elections develop and how the candidates' promises pan out.

Kovacevic: Who can guarantee that things will not remain the same for the next two or three years?

Stamenkovic: We do have a chance now. But instead of using it, we keep talking about past events, about our glorious history.

The most serious presidential candidate [editor's note: Yugoslav President Vojislav Kostunica] said the other day that we do not need young people who return from abroad, thus sending them a message to go back. He said that Serbia will find the strength it needs from within. The hell it will!