Devaluing The Dinar, Like It Or Not

The Yugoslav dinar's black market value slipped by five per cent in just one day last week sending thousands of Serbs scurrying to street dealers to convert what dinars they have into German marks.

In the wake of this and further sharp falls in the value of the Yugoslav currency, many Serbs anticipate imminent devaluation and fear a return to the hyper-inflation which marred 1993 and wiped out the savings of a generation of pensioners.

In an attempt to quash rumours and calm the situation, the Serbian government, in the person of Deputy Prime Minister, Dragan Tomic, officially denied that the preparations for the official devaluation were underway. Two journalists who reported otherwise were arrested on September 15.

"I take the responsibility to say that there will be no devaluation, and that all rumours about an alleged devaluation of the Dinar, that are being spread these days, are exclusively an outcome of attempts by various smugglers and speculators to take money from naive people in an easy manner," Tomic said.

Had he left it at that, Tomic might have succeeded in reassuring at least part of the public that the government was keeping the money supply under control. However, he went on to portray a ridiculously rosy assessment of economic prospects, at odds with the every-day reality for almost the entire population.

"Reconstruction and economic recovery are proceeding successfully", he said, adding that: "Industrial production is on the rise month in, month out, while excellent results are being recorded in the sphere of the agricultural production, as if there had been no war."

The official exchange rate of 6 dinars to the German mark, and 11 dinars to the US dollar, was set on 1 April 1998 after an 82 per cent official devaluation of the dinar. And it has remained at that rate, despite increases in the money supply which have caused the unofficial "street valuation" to slump.

In this way, already by September last year the black market value of the German mark was 6.6 dinars, and by the end of 1998, it was 8.2 dinars, reflecting the printing of about two billion additional dinars without any cover.

Three months before NATO's bombing campaign, the dinar continued to lose the value fast, so that by the time the first bombs fell, the German mark

was being traded on the streets for about 10 dinars. This trend continued throughout the Kosovo war, so that by mid-June the German mark's

black-market value had risen to 11.5 dinars.

The day last week when the dinar lost five per cent of its value, the street exchange rate slumped from 12.4 13 dinars to the German mark. The non-cash rate used for large transactions-which most closely corresponds to the real commercial exchange rate-is another 20 per cent weaker.

Economists believe that during the first nine months of this year, even before the September monetary shock, the National Bank of Yugoslavia quietly printed about 2.5 billion dinars. Meanwhile, in the same period production dropped by about 40 per cent and foreign trade declined by half.

The official exchange rate continues to undermine exports, while making imports unrealistically cheap. Moreover, the state continues to lose income from customs revenues, since the customs base is calculated according to the official exchange rate.

Although the dire economic situation can no longer be concealed simply by appeals to patriotism, the government refuses to consider devaluation.

Instead, just as it has simulated military victory over NATO and Serbian sovereignty over Kosovo, it appears now to be simulating economic recovery and post-war prosperity.

While a one-day five per cent fall in the value of the dinar appears a long way short of the situation in 1993, when the Yugoslav currency was losing half of its value most days, many indicators, both political and economic, suggest that Yugoslavia may be on the verge of a re-run.

Dimitrije Boarov is an economics writer for Belgrade weekly Vreme.