SERBIA and MONTENEGRO
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The Yugoslav dinar is one of the world's worst performing currencies over the last few decades. Spectacular currency crashes, one right after the other zapped the confidence in the use of this fiat money issued by the government of former Yugoslavia. As such, it is taking time to rebuild the trust where faith in paper currency is minimal. Over much of the last 15 years, the Yugoslav dinar essentially had no value as nobody would accept them including border guards at toll booths, hotels, shops, etc. Accordingly, many residents resorted to barter and foreign currencies to settle transactions including the Austrian schilling while setting up their banking affairs in neighboring countries where a safe banking sytsem was established.

During the 1990's terrible political leadership under former Yugoslavian President Milosevic led the country into costly ethnic wars with former Yugoslav republics Bosnia, Croatia, Kosovo and others resulting in the decimation of the economy, infrastructure and destruction of the currency through several hyperinflations. It was not until the effective leadership of former U.S. President Clinton to take action and implement the Dayton accord in 1995 and NATO's involvement to stop the carnage in Kosovo in 1999 that eventually resulted in the removal of former Serbian President Milosevic from power in October 2000. Fortunately, a new responsible government is in place and has the backing of the West including the IMF and World Bank along with other multilateral lenders. Will history repeat itself in Serbia and Montenegro or will constructive change lead the way for this part of the world?

POLITICS:
new Serbian President Svetozar Marovic since March 2003 of the ruling Democratic Party has replaced former President Kostunica who himself replaced the former dictator ruler Milosevic. Serbia is fractured and divided politically with several parties. And in the republic of Montenegro, political instability has taken hold as well over the last few years. At present, a loose union with Serbia and Montenegro is currently in place as the former name 'Republic of Yugoslavia' which was abolished and ceased to exist in February 2003. Each respective republic has 3 years for a vote on independence. Assassinations have been common since 1997, most recently with Prime Minster Zoran Djindjic in March 2003 who was instrumental in leading the revolt to topple former President Milosevic. It is this difficult and complex political environment that is still holding back the economy, it will take several years before Serbia and Montenegro will be able to return to the higher standard of living it once enjoyed during the 1970's and 1980's.

ECONOMY: the Serbian economy is still a disaster but improving with economic recovery from reconstruction projects underway from the war, foreign aid support and a new relative political stability. Today, 30 percent of the population live below the poverty line as the Serbian economy is only 50 percent that of its 1990 economy output level. The transition from the former socialist model economy under former President Milosevic to a free market economy is in progress. Privatization and Western style economic reforms including prices being freed, reduction in tariffs, support for open trade and international investment are vital new elements of the Serbian economy unlike the previous criminalized economy as it slowly gets dismantled. Economic aid has played a major role with $2 billion USD already pledged in year 2001.

The national debt is being negotiated with both the London and Paris Clubs in order to drop the debt level to a manageable 70 percent of GDP from 140 percent. Industries include mining & metals, heavy industry - machinery, electronics, chemicals, consumer goods, agriculture, etc. Major export markets include Italy, Bosnia, Germany with Serbia and Montenegro currently running a trade deficit of approximately $2 to $3 billion USD/year.

Economic Statistics
GDP as measured by purchasing power parity is at $25.3 billion USD (2002), GDP/Capita is accordingly at $2,300 USD (2002). GDP as measured by market prices is the $10 billion USD (2000) range. GDP growth rate for 1999 fell 26 percent, year 2000 with positive growth at 7 percent, 2001 at 5.5 percent, 2002 at 3.5 percent and 2003 is estimated at 4.5 percent. Year 1999 inflation was recorded at 42 percent, 2000 at 70 percent, 2001 at 100 percent and more recently 2002 at 18 percent and 2003 is forecasted at 14 percent. Current account deficit for 2002 was at 8.2 percent of GDP primarily due to the expenses of reconstruction. Unemployment is at 28 percent although the labor force is only 3 million.

POSITIVE: fairly well educated population for the 10.6 million citizens. CONCERN: mafia and gangs, slow pace of privatization, poor infrastructue from bridges & roads destroyed from the war.

BANKING SYSTEM: the Austrian schilling, US-dollars and/or the Euroland euro are accepted for those tourists visiting Serbia. Credit cards and dinars do not work well for visitors over the last few years although this is now slowly improving with more currency stabilty in the new dinar. Yugoslavian hard currency bank accounts were frozen in 2000-01 at a time of heightened political instability. The central bank for Serbia is the National Bank of Serbia. With bank reforms, 4 large insolvent banks have been closed as privatization & consolidation have taken hold. Discount interest rates are at 9 percent. International reserves have improved tremendously and are at 3 months import coverage for 2002 equivalent to $1.8 billion USD which is quite satisfactory.

REGIONAL ANALYSIS: Kosovo, former Yugoslav Republics
In the early 1990s, Yugoslavia disintegrated into 6 Republics each following ethnic lines. Kosovo and its 1.8 million Albanian citizens are still technically part of Serbia and Montenegro but under that of U.N. administration. The euro and Yugoslav new dinar are official currency for Kosovo. Former Republics of Yugoslavia no longer use the Yugoslav dinar as each new country has their own respective currencies ie. Croatia uses the kuna, Slovenia's new currency is the tolar. A total of 6 republics made up the former Yugoslavia including Serbia, Montenegro, Macedonia, Croatia, Bosnia, Slovenia and Albania. The region is volatile with a recent history of violent conflict, wars, ethnic cleansing and bitter feelings across borders. However, over the long term, free trade agreements will be signed within the region ultimately resulting in the sharing of economic benefits but each with their own political independence.

KNOWLEDGE: political stability will most likely take hold although the region is fractured along ethnic lines unlike countries like Canada & Switzerland where they each have respected and successful federal states in place whereby their citizens enjoy a higher standard of living due to political stability. Time in BI.C's view will heal these divisions. To date, international pressure is winning as former Yugoslavian war criminals are being brought to justice for their role in the 1990's ethnic cleansing resulting in several wars. The Kosovo war alone led to the expulsion of 800,000 ethnic Albanians. International financial support will help to rebuild Serbia and Montenegro and allow the region to grow. Current difficulties include the drug trade, human trafficking and the large refugee population. Under former President Milosevic's role alone, it was alleged that his regime and family amassed a fortune worth hundreds of millions of US-dollars in black market currency deals, cigarette & drug smuggling.

CURRENCY:
ISO Symbol 'YUM', Yugoslav new dinar. At time of review on May 5, 2003, the new dinar had an exchange value of 57.60 YUM to the USD. On May 15, 2002, the new dinar became convertible, that is the dinar can now be freely exchanged for foreign currencies. Since 2001, a managed floating exchange rate regime has been in place tied to the euro 'EUR'. Large capital inflows have recently supported the dinar as foreign investors take advantage of new markets, reconstruction projects and a favorable investment trend taking shape in Serbia. Since former President Milosevic left power, the freeing of prices and liberalization of the economy have resulted in the previous multiple exchange rate regime now being unified as this took place in November 2000 whereby the fixed and parallel exchange rates were merged. The authorities have continued exchange rate liberalization plans. The Republic of Montenegro has no direct economic ties to Serbia, uses its own central bank located in the city of Podgorica and currently the Euroland euro serves as official currency as the Yugoslav dinar was dropped in 2000. The Yugoslav dinar had an exchange value of 30 YUM to 1 German Deutschemark in October 2000. More recent valuations for the new dinar have included January 2002 at 65 YUM to the USD and December 1998 at 10 for official rates. Market rates have trades upwards of 50 to 70 percent higher on the premium.

CURRENCY HISTORY: in year 1873, the region first used the gold dinar. By 1884, first dinar banknotes were in use exhangeable by gold. The Yugoslav dinar since 1990 alone has witnessed one terrific currency crash after another where zero confidence in government is reflected in this paper currency during this time. In January 1990, currency reform was implemented where 10,000 old dinars for one new dinar where it was pegged to the German Deutschemark at 7:1. During 1991, the dinar was devalued by 31 percent, January 1992 devalued again by 80 percent, April 1992 devalued by another 57 percent. In July 1992, its was further devalued by 85 percent and then consolidated at a ratio of 10 to one. In early September 1992, the dinar was devalued by 73 percent and by late September 1992 a further 73 percent devaluation. At this time with the concurrent war, inflation was running at unbelievable hyperinflation level of 20,000 percent. In 1993, the dinar was devalued 5 more times anywhere from 50 to 80 percent. In September 1993, the dinar was devalued by 98.4 percent as it fell from 750 to 48,000 dinars to the USD. In October 1993, another round of currency reform took place with the old Yugoslav dinar now replaced with a new Yugoslav dinar at a phenomenol rate of 1 million to one. In January 1994, the Yugoslav New Dinar is introduced in parallel to the Yugoslav dinar pegged to the deutschemark at parity. In December 2000, a new convertible Yugoslav dinar was introduced.

CURRENCY FORECAST: continued modest depreciation versus the EUR although there is actually strong demand for dinars now within a new era of overall relative stability. The economy is finally making progress with disinflation, an increase in reserves along with exports & output. Long term is most likely official independence for both Serbia and Montenegro each having their own republics and currencies. Membership for both to the European Union will be achieved several years forward once they have obtained political and economic stability although Serbia is presently vying for a feasiblity study for entrance into the EU. Serbia and Montenegro are now making positive progress with reforms to attract international investment and to ensure the rule of law is followed to allow for wealth creation.

Economic risks include the trade and current account deficit position although it is currently being offset by large capital inflows. Continued economic growth and reconstruction should correct these misalingnments over time. Political risk is the largest threat to the Yugoslav new dinar although the odds for a repeat of the 1990's ethnic wars and repetitive massive currency devaluations are unlikely. The currency risk ranking remains low due to the inherint vulnerabilities to renewed domestic violence currently in place as recently noted with the assassination of Prime Minister Djindjic. For more information on the Euroland euro 'EUR', plese click EUROPE in this BI.C currency index. For more information on the former Yugoslav republics (Croatia, Albania, etc.) and their respective currencies, please search this BI.C currency index for further information.
UPDATED: May 5, 2003.

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