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Text File | 1994-05-02 | 22KB | 424 lines

<text> <title> Macedonia: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Yugoslavia </hdr> <body> 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. 1. General Policy Framework 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. 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. 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. 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. 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. 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. 2. Exchange Rate Policies 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. 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. 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. 3. Structural Policies 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 c