For how long will Serbian currency remain stable, and can we say "no" to IMF?

Whether we need the IMF is a question that emerged after a statement made by NBS Governor Jorgovanka Tabakovic, who said there was no reason to heed IMF's recommendation and allow greater fluctuations in the dinar exchange rate.

She explained this with the citizens' trust in the dinar and in the stability of the domestic currency.

Whether optimism is justified is another question?

"The job of the governor is to conduct a stable dinar policy, and without any doubt, she does that well, but in the long run it's not very good," Ljubodrag Savic, an economist and professor at the Faculty of Economics in Belgrade, told Telegraf Biznis.

As he explains, for a country that wants to increase exports the policy of a strong instead of a moderate dinar is always good - but a strong dinar is bad in the long run.

"The hard dinar policy proved itself to be bad in 2001, when our industry collapsed, and it was more profitable to export, trade, than to produce. It would be good for us to have a moderate depreciation, or a moderate weakening of the dinar," he says, adding that a moderately strong dinar stimulates exporters to produce and export - but it's important for how long that lasts.

"The worst thing is to have a policy of an uncontrolled dinar exchange rate, that's 124 dinars for one euro one time, and then, 120 or 118. The economy needs to know what to expect," says Savic.

How realistic is it for this stability to last, and what affects it?

Photo: Tanjug/Sava Radovanović

"I can estimate with confidence that the dinar will remain this way at least until next year's elections. Therefore, one reason is political in nature, and the other is essential, that is, it's about economic indicators, above all about investment growth," he says.

As yet another reason why the IMF should not be listened to, the governor said, is that in Albania, for example, a greater exchange rate flexibility has been applied on IMF's advice - and that country is facing an increasing percentage of overall euroization.

Savic does not dispute this, but points out that the IMF certainly did not ask anything of us, that is, it did not demand that we pursue a policy of a weak dinar, but had instead advised our monetary authorities, i.e., the National Bank, NBS, to let up and allow some movement, to sell hard currency, instead of reacting.

"In Albania, the consequence was actually what happened to us a few years ago - as soon as they'd get some dinars, people would run to buy euros, not believing in the dinar. Today, we have the opposite, people are even saving in dinars," Savic says, adding that the reason is the dinar savings interest rate of one to two percent, and no taxes (unlike other types of savings).

"Which is very important because if we had a repressive exchange rate, all that would be gained would be lost through the growth of interest rates and exchange rates, and it's important for every country not to do capital transactions in euros, we must change this tendency. We've been through a tough period, people don't like instability. We had Jezda and Dafina (pyramid scheme organizers in the 1990s) and as soon as they notice the least bit of waves, people would start buying another currency," Savic says.

Governor Tabakovic says that if the central bank were to accept the advice of any international financial institution, including the IMF, it would have to have reasons to do it.

"For example - that you are not successful enough and that this advice promises better results. But how are we to expect better stability in dinarization or in anything else, if more flexibility in the exchange rate is allowed," asked Tabakovic.

The governor also said that the NBS is responsible for the policy it is pursuing and that precisely because of this policy the central banl expects even more dinar savings, which she also spoke about during her interview with Telegraf Biznis.

Savic certainly thinks that it's good for Serbia to have an arrangement with the IMF, because, thanks to a previous program with the international financial institution, Serbia's public finances were rehabilitated, he pointed out.

Following the successful completion of the three-year stand-by arrangement, Serbia and the IMF entered a new Policy Coordination Instrument (PCI) in July last year, which is a non-financial arrangement that plays an advisory role and is primarily focused on implementing structural reforms, and lasts for 30 months.

(Vesna Bjelic)