BANKING IN YUGOSLAVIA - A game of corruption 

by Marcel Baumler

As political instability continues to flourish in Serbia and Montenegro, so does a sickly economy.  A shrinking economy, huge external debt and currency devaluation are among the countries largest problems.  The banking sector has been tremendously effected by these problems. Today most of the Serbs do not trust banks enough to hand-over their savings.  Instead they gard their life-long savings <<under their pillows>>.  All in all, as much as $4-6 billion worth of these kind of savings are estimated to be harbored outside the banking system.


     A two-tier banking system was introduced in ex-Yugoslavia at the beginning of the 1960s. almost 30 years before the other communist countries.  The banks had a great deal of autonomy and experience of dealing with Western Banks.  But they also functioned in a legal and institutional environment that severely weakened them.2

 After a short period of economic reform in the 1960s, when banks were allowed to pursue profits, the reforms were rejected as "dangerous to socialism".  Banks were no longer allowed to create profit but only redistribute it.  A conflict of interest was built in because they were founded and owned by state-owned enterprises, and the state formed the main loan customers.

 Interest rates were set below inflation rates, and banks assumed exchange rate risk, frequently ending up with an open foreign position. Banks were under political pressure to lend without rigorous assessment of credit risk, and when they ran into problems were bailed out by the central bank.  This expansionary monetary policy led to high inflation.2


     In 1990, before the collapse of Yugoslavia, 30% of banks' total assets were bad, and the foreign exchange reserves were taken over by the National Bank of Yugoslavia.  As the communist bloc disintegrated, some banks lost around 50% of their markets and, consequently, all their assets.2

The first dramatic blow was the hyperinflation of the early 1990s. This eroded the real worth of dinar bank deposits.  At the same time, bank customers were suddenly confronted with the sudden freezing of their foreign currency bank deposits.  These resources, worth in all some $6-7 billion, were promptly siphoned off by the Milosovic regime to help finance its war in Bosnia and Croatia.

Hyperinflation was halted in its tracks in 1994 by tough stabilization programs.  More recently, a scheme has been put together to replace the bulk of the frozen foreign currency bank deposits with a special issue of 15-year government bonds yielding 2% interest.  The idea is that 85% of the frozen deposits would be dealt with in this way.  The other 15% would become responsibility of the original deposit-taking bank.1

Two further factors undermining confidence were the economic impact of the war in Bosnia and Croatia and the consequences of the financial and trade sanctions imposed by the west.  Serbia-Montenegro suffered little direct physical damage from the fighting, unlike Bosnia and Croatia. Moreover, Serbia-Montenegro had an advanced industrial structure, a rich farmland, and plentiful mineral resources, particularly copper.

Even so, the Serb-Montenegrin economy had shrunk by half by the time of the Dayton, Ohio, peace accord in 1995.  Furthermore, sanctions, which have been maintained in place ever since Dayton, still excludes Serbia-Montenegro from the funding and advice of the International Monetary Fund, the World Bank, and the other leading international

financial institutions.  Likewise, its long-standing failure to arrive at a settlement with the London club of commercial bank creditors and the Paris club of government creditors has long cut it off from access to the international capital markets.

 A deal was eventually struck with the London club in July 1998.  It involved the restructuring of some $1.7 billion worth of debt, including the Serb-Montenegrin share of the former Yugoslav federation's debt to international commercial banks.  Three-quarters of the outstanding principal would be converted into $ 915 million worth of 20-year "capitalization bonds".  A further 25% of the principal and 67% of the accrued interest would be converted into $615 million worth of "performance bonds", while a third type of security would be issued for $ 181 million.  The remaining 33% of the accrued interest would be written off.1

However, the deal is unlikely to mean that Yugoslav banks and companies will soon be able to raise foreign bank loans. Serbia-Montenegro still owes the Paris club of the official creditors some $3.6 billion, the IMF and World Bank some $ 1.6 billion, and other financial institutions some $1.2 billion.  In all Yugoslavia is reckoned to have an overall external debt of more than $ 10 billion.1      In addition, the Yugoslavian economy is still in a very weak state, despite the recovery in output through stabilization programs.  Moreover, so long as the Serbs continues to conduct their heavy-handed, military-style "police operation" in Kosovo, the federation is likely to go on being shunned by lenders as well as continue to be marked down by the credit agencies.  Furthermore, the risk that mysteriously you never see your money again as it is siphoned away to finance a war still remains.

Understandably, Serbs and Montenegrins prefer to hang on to their savings rather than entrust them to the federation's 100 or so banks.  It is reckoned that fewer than 10% of all financial transactions are conducted through the banking system.  Much of the rest is carried out through the black market, mostly in Deutschmarks and US dollars. 

There are little incentive to deal with the banks given their prior corruption and inefficiencies.  The black markets have proven to be the way of life for most.  Certainly they are more reliable, and offer better rates of exchange than the bank.  Until Yugoslavia gets its economy and political situation up to par, banking will remain to be mistrusted which will continue to slow down the badly needed economic progress.   




OK Economics was designed and it is maintained by Oldrich Kyn.
To send me a message, please use one of the following addresses: ---

This website contains the following sections:

General  Economics:

Economic Systems:

Money and Banking:

Past students:

Czech Republic

Kyn’s Publications

 American education

free hit counters
Nutrisystem Diet Coupons