Serbia Puts The Brakes on Hyperinflation, For Now

AS its smokestack fumed day and night, the Yugoslav National Mint was once jokingly called the only enterprise that worked around the clock in the rump Yugoslav union of Serbia and Montenegro.

But that is no longer so. For just over a month, Yugoslav authorities have put the brakes on the unchecked minting of the dinar under a crash program to rescue the national currency from one of history's greatest explosions of hyperinflation.

Introduced on Jan. 24, the currency-stabilization program has succeeded - to the relief of 10 million Yugoslavs and the acclaim of President Slobodan Milosevic's Socialist Party. Monthly inflation has plummeted from 313 million percent at the end of January to 0.6 percent, according to government figures.

But many experts, including the program's author, Dragoslav Avramovic, worry that the recovery will be short-lived, and the country may plunge into a currency crisis worse than the last. ``It is not easy to say how our economy will develop further,'' Dr. Avramovic conceded in the latest issue of the Belgrade-based magazine, Vreme. ``The Socialist Party of Serbia will probably demand greater state involvement.''

``It is not difficult to stabilize, and it is not difficult to hold for a couple of months. But it is difficult ... to maintain it on a long-term basis,'' says Ljubomir Mad-zar, a former finance minister.

Many believe Mr. Milosevic sees the stabilization program only as a way of containing social discontent long enough for him to reach a settlement in Bosnia-Herzegovina that would end the sanctions imposed by the United Nations on rump Yugoslavia in May 1992 for its role in the conflict. Milosevic remains unwilling to risk the political costs of redressing the main generator of hyperinflation: rump Yugoslavia's estimated $2.5 billion deficit. Without fresh foreign capital and sweeping economic reforms, the deficit will continue to grow.

[Charles Redman, the United States envoy to former Yugoslavia, met with Bosnian Serb leaders and their patron, Serbian President Slobodan Milosevic, in Belgrade on Tuesday for what he described as ``preliminary talks'' to draw Bosnia's most powerful faction into the Muslim-Croat federation plan, Reuters reported. Mr. Redman yesterday reported progress at the Vienna talks on the plan. But he cautioned the agreement could not bring full-fledged peace in Bosnia without the participation of the Bosnian Serbs, now holding 70 percent of the republic.]

Hyperinflation resulted from the unrestrained printing of cash to fill state coffers drained by the collapse of former Yugoslavia's single market, the Serbian military conquests in Bosnia and Croatia, uncontrolled public spending, inefficiency, and widespread corruption. This was all exacerbated by the UN sanctions.

Milosevic's answer was to issue bills in increasing amounts - the highest was the history-setting 500 billion dinar note - every few weeks, followed by periodic denominations. That perpetuated the hyperinflation.

He was forced to implement the stabilization program when cash could not be minted in sufficient amounts and large enough denominations to keep pace with the more than 2 percent hourly decline in the dinar's value.

The stabilization's centerpiece is a ``new dinar,'' nicknamed the ``super dinar.'' It was fixed at a rate of 1 to 1 with the German mark and sold for hard currency only at state banks.

Avramovic, who was named Yugoslav National Bank president last week, said the new dinars would not exceed the state's gold and hard currency reserves, which are believed to be only $200 million.

Public confidence in the currency slowly began to return. Prices crept down as the number of new dinars in circulation increased. As commerce picked up, salaries rose from about $3 per month to just over $20.

Shops are full again. People aren't rushing out to spend wages whose values decreased by the minute. Gone are the lines of people crossing into Hungary to shop or clogging banks and post offices, waiting for them to accumulate cash to cover checks.

Avramovic's program depends on building foreign reserves and reducing the state deficit by increasing production, boosting consumption, collecting massive new taxes, and cutting spending.

But many experts doubt those targets can be met, especially given the UN blockade on imports and exports. Economists, therefore, dispute as unobtainable Avramovic's projection of GDP in 1994 at $10 billion. Professor Madzar forecasts it will be no more than $6 billion. Experts also dispute Avramovic's claims of foreign currency reserves. He says the state has $500 million, a figure critics say includes $300 million held by wary commercial banks and enterprises.

A Western diplomat noted that as of mid-February, the Yugoslav National Bank had issued only 153 million new dinars, or $90 million. That is the equivalent of $9 per person, too little for long-term economic stability, he says.

Western diplomats say the program faces its major test in the next few weeks, when the state must come up with $200 million above its current hard currency reserves to fund credits to farmers for spring planting.

In the past, the state ``cranked up the printing presses to give the farmers as many credits as they needed,'' the Western diplomat says. Now it will need sufficient foreign currency reserves to avoid jeopardizing the new dinar.