Serbia Dinar Slide Worries Consumers, Govt

With investors fleeing emerging markets in the aftermath of the global credit crunch, and little light at the end of Serbia’s political tunnel, the dinar currency slid to a new record low of 97.50 to the euro this week, having lost a quarter of its value in four months.

Most Serbs, who have fixed salaries in dinars, feel bewildered by the fall of a currency that was considered stable until only a few months ago. Having seen their purchasing power slide as the weak dinar makes imported goods more expensive, they worry about meeting their mortgage payments or being able to repay consumer loans, usually denominated in euros.  

“My wage is in dinars, so this is killing me,” Tomislav Tomasevic, a graphic designer in his 20s, told Balkan Insight. “Realistically I have lost more than 10 percent of my pay since I started my job a couple of months ago.”

As part of an inflation-targeting policy which sees a managed float for the dinar, the central bank has been intervening modestly but almost daily, with little effect. It has spent some 300 million euros supporting the dinar in the last month alone, a policy that has landed it in a tug of war between economists and the government.

"The amount of money that can secure the stability of the exchange rate does not exist, because we need an unlimited amount of money which we used to get from selling property and getting into debt,” said economist Ljubomir Madzar. “Everything has its expiration date. Exports must pick up and that is the government's responsibility. I believe that the NBS cannot effect the trend of the dinar's fall, even if it spends all of its foreign reserves, it can only contain the swings."

Milan Kanjevac of the Institute for Market Research said the current exchange rate “is not realistic."
“The realistic exchange rate is 150 dinars to the euro, and the state and National Bank of Serbia are fighting to decrease it,” Kanjevac said. “I think that the dinar does not have to be defended because that hurts exporters and works in the favor of importers, which damages our local industry.”

Although usually reluctant to meddle into the central bank’s business, the government has pushed the other way, taking the unusual step of counseling that the sinking dinar would do better with more aggressive central bank intervention.

“If I were the governor, I would have intervened more using our hard currency reserves” instead of waiting to see inflows of fresh capital, said Deputy Prime Minister Mladjan Dinkic, himself the predecessor of current central bank governor Radovan Jelasic.
“The governor has been reluctant to spend them, but the reserves are there to be spent in a time of crisis. It is important for the dinar to be stable, and the reserves will be replenished.”

Jelasic has deflected criticism, saying the central bank would continue trying to limit extreme daily swing, but conceding that there is only so much it could do.
"Clearly the market is looking for a new balance,” he told daily Blic  “and the central bank needs to weigh up both the issue of the exchange rate and the volume of foreign currency reserves."

After Dinkic noted that defending a fixed dinar rate would cost “a maximum of 1.3 billion euros”, officials started offering their two cents on how to resolve the crisis.

Some help could come from the inflow of the 400 million euros owed Belgrade by Russia’s Gazpromneft for the sale of a majority stake in state oil monopoly NIS – an amount Energy Minister Petar Skundric said would be paid this week, as opposed to later in the year.

Finance Minister Diana Dragutinovic pointed to the IMF loan cushion and said that if the dinar continued to fall, Belgrade should consider withdrawing from the 402.5 million euro approved by the Fund earlier this month – a loan Serbia said at the time was just precautionary.

Deputy Prime Minister Bozidar Djelic went even further, saying that the government would extend cooperation with the IMF if necessary to boost foreign currency reserves.

"I want to inform you that I have initiated negotiations with our European partners, the European Commission, for receiving macrofinancial support, which means receiving 400 million euros that we can use for the budget as well," Djelic said. "These funds will be available starting February, and exporters can count on them in these and complicated economic times."

But analysts said that neither the IMF funds nor the NIS payment would be enough to change the trend, not without steady and regular capital inflows.

"If the supply of foreign currency on the domestic market increases, the dinar could be stable, but for only three to five months,” said Aleksandar Stevanovic of the Center for a Free Market. “For a longer period, we need direct foreign investments and improving the business atmosphere in order for foreigners to bring their money here."

The timing could hardly be worse, as the global financial crisis means  tighter loan conditions that scupper the investment and expansion plans of many firms. As part of its downward revision of most east European countries, the European Bank for Reconstruction and Development also cut its forecast for Serbia’s 2009 growth to 2.0 percent from 3.0 percent in its latest report.

“I am concerned because I don’t know how far it will go and whether we are entering a longer period of insecurity again,” said Ivana Hercigonja, a Belgrade psychologist in her 50s. “The worst thing is that we do not know when it will end. This is not only tied to the situation in Serbia, like it was in the 1990s, the whole world is in crisis.”