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1994-05-02
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<text>
<title>
Croatia: Economic Policy
</title>
<article>
<hdr>
Economic Policy and Trade Practices: Yugoslavia
</hdr>
<body>
<p>Note: The successor states to Yugoslavia are Bosnia and
Hercegovina, Croatia, Macedonia, Serbia and Montenegro, and
Slovenia. Bosnia and Hercegovina declared independence in April
1992.
</p>
<p>1. General Policy Framework
</p>
<p> Since midsummer of 1991, Yugoslavia has been torn by a
violent internal conflict. By the end of 1991, four of the six
republics which constitute Yugoslavia--Slovenia, Croatia,
Bosnia-Hercegovina, and Macedonia--had declared their
independence. In December, the European Community announced its
intention to recognize any Yugoslav republics which met certain
criteria. Only Montenegro and Serbia continue to recognize the
authority of central government institutions and regulations.
The political and economic situation in Yugoslavia remains
highly unstable. This report outlines the situation at the end
of 1991. It is difficult to predict what form the policies
discussed below will assume when the conflict ends.
</p>
<p> As the Yugoslav Federal Government disintegrated in 1991,
Yugoslavia's economy descended rapidly towards chaos. The
promising economic reform program that Prime Minister Markovic
implemented in mid-1989 was stymied in 1990 by the increasingly
nationalist political agendas of Yugoslavia's major republics.
Critical reforms in the banking system, privatization, and tax
regime were derailed. In virtually every area of policy,
republic legislation became more sovereign than federal law,
culminating in the proclaimed secession of Slovenia and Croatia
in late June 1991. Trade and tariff legislation became the de
facto domain of the republic governments, whose perspectives
were frequently dominated by short-term revenue needs and
apparent desire to inflict economic damage on other republics.
The virtual collapse of the economy and "rule of law" in
Yugoslavia resulted in the suspension of trade credits and
investment guarantees by foreign government agencies, as well
as the suspension of assistance from the IMF and World Bank.
Federal authorities were unable to exercise inspection
responsibilities and in late 1991 suspended health and safety
certification of Slovenian agricultural and aviation
industries. The "reworking" of economic relationships between
republics and with the outside world, including the U.S., cannot
proceed until Yugoslavia's violent internal conflict is
resolved. The European Community and the United Nations continue
to undertake efforts to achieve a peaceful, negotiated solution
to the crisis.
</p>
<p> Centrifugal forces in each of Yugoslavia's six republics have
left the Federal government with little influence over economic
policy. Laws of one republic are not enforceable in other
republics and the republics have ceased funding the federal
budget.
</p>
<p> The federal budget process has been severely distorted by the
demands of the civil war, as the Yugoslav People's Army (JNA)
consumes growing portions of the budget. Press reports claim
that up to 80 percent of the proposed 1992 federal budget will
be devoted to funding the JNA. Disagreement with the new budget
priorities led Prime Minister Markovic to resign in December
1991. Since mid-1991, federal expenditures, including the
increased demands by the federal military, have largely been met
by inflationary money creation and the extension of credits to
the federal government by the National Bank of Yugoslavia (NBY).
Although inflation had been earlier rekindled by the republics'
refusal to observe government spending and wage restraints, the
massive federal monetary expansion to meet budget obligations
and growing costs of Yugoslavia's civil war seems certain to
lead to the re-emergence of hyperinflation.
</p>
<p> The strongest federal institution is the National Bank of
Yugoslavia (NBY), whose influence is ensured by its control over
Yugoslavia's remaining $3.8 billion in foreign exchange
reserves. As of late 1991, it was unclear how long the NBY could
continue to operate in a relatively neutral manner and carry out
its mandate to meet the payments-schedule for federal debts and
guarantees. Yugoslavia's external debt continued to decline in
1991, with medium- and long-term debt dropping to $14.5
billion, but foreign exchange reserves will be virtually
exhausted by early 1992.
</p>
<p> Inflation reached an annualized rate of over 700 percent in
October 1991 and continued at this level through the end of the
year. Year-on-year industrial production declined by almost 20
percent in 1991, following a 10.5 percent decline in 1990.
Unemployment exceeds 20 percent in Yugoslavia, with pockets in
the poorer republics and provinces exceeding 40 percent.
Yugoslavia's civil war has resulted in a major decline in
national income (GDP), with official estimates projecting a
20-30 percent decline for 1991, and an even more massive decline
in 1992. Thanks to sizable tourism earnings and overseas
workers' remittances, Yugoslavia enjoyed seven straight years
of current account surpluses until 1990. The future of these
critical sources of foreign exchange is now in doubt. In 1990
Yugoslavia suffered a current account deficit of $2.4 billion,
and the 1991 current account deficit is likely to reach three
billion dollars or more, leaving foreign exchange reserves at
a dangerously low level.
</p>
<p>2. Exchange Rate Policies
</p>
<p> The foreign exchange rate for the Yugoslav dinar is set by
the Federal Government (FEC) and has been pegged to the Deutsche
mark (DM) since January 1990. Exchange rates for other
currencies are determined by their cross rates against the DM.
The current official rate of 13 dinars per DM has been in effect
since April 1991, but the importance of the official rate has
been eroded by the emergence of parallel "black market" exchange
rates. Yugoslavia's high domestic inflation relative to
Germany, and a general loss of confidence in the economy, has
made the official rate increasingly unrealistic, and commercial
banks are now commonly paying bonuses of 150 percent, approved
by the individual republican authorities, to compete with black
market rates and provide incentives for exporters. Some
republican authorities are also cracking down on previously
tolerated black market dealers. The rapid real depreciation of
the dinar and lack of hard currency is clearly depressing
Yugoslav imports, which are down 28 percent from 1990. The
contracting Yugoslav domestic market and large-scale non-payment
of internal obligations have encouraged Yugoslav enterprises to
look abroad for sales. Encouraged by substantial foreign
exchange profits, Yugoslav exports have only declined by 8
percent from the 1990 level, narrowing the visible trade deficit
to a projected $700 million.
</p>
<p> On October 7, 1991 Slovenia announced its own transitional
currency, called the tolar, and initially fixed its value at 32
tolars per DM (Croatia announced a similar move "in the near
future"). All dinars held by Slovenian citizens were to be
exchanged at par with the tolar over a three-day period.
</p>
<p> Subsequently, the Slovene government allowed some dinar
exchanges, but at discounts of 15 to 40 percent against the
tolar. Croatia and Slovenia signed an agreement in late October
to allow their businesses to make payments in each other's
currencies. Although the Slovenian currency is not recognized
by foreign governments, and trade with other Yugoslav republics
and the world is largely carried out in hard currencies and
barter, Austrian and Italian banks bordering Slovenia are
accepting the tolar in limited quantities to satisfy
cross-border trade needs.
</p>
<p>3. Structural Policies
</p>
<p> The key structural issues facing Yugoslavia and its
constituent republics are radical reform of the bankrupt banking
system and large scale industry, privatization of the economy,
and comprehensive tax reform. Without these reforms, Yugoslavia
and the republics face con