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This week's special

Serbian banking reform
BELGRADE, Yugoslavia, July 10 (UPI) -- Just as the rest of Europe is embracing the new common currency, Serbia is leaving the euro zone.

As of July 1, customers must make transactions exclusively with the national currency, the Yugoslav dinar. While seemingly another example of the insularity and intransigence that have characterized Serbia's economy since the 1990s, economic planners in Serbia have compelling reasons for opposing the euro.

The dinar, says the government, is the national currency and deserves to be treated with respect. They feel it has earned it. Indeed, since a re-valuation in December 2000, its value has barely fluctuated. The dinar has remained stable for two years -- astonishing, when one considers its historic identity as one of Europe's more volatile currencies.

Belgrade is also aware that EU accession for Serbia remains distant. Thus, there is no overwhelming need for the euro.

Ironically, the euros very popularity in Serbia was responsible for its demise. Inhabitants of the Balkans have long made transactions with currencies prized higher than the national ones. Yet in Serbia, using the euro has also exacerbated pervasive problems such as money laundering. With the reforms, cash should become more easily tracked. Large bank deposits will now require source documentation.

Serbia's reformed regulatory system is also key to these anti-corruption efforts. Says one economic insider in Belgrade, "the financial police have been cleaned up. They are, first of all, helping honest shopkeepers learn how to manage their books, in order to pay less taxes. The flip side of this new liberal attitude is the following: when they shut someone down -- and they do -- he really was cheating."

Yet the turn away from the euro is neither the most appealing nor the most controversial of Serbia's total package of banking reforms.

To motivate people to use banks, the government is introducing attractive new tax rates on financial transactions. The driving force behind this reform is Mladjan Dinkic, president of the National Bank of Yugoslavia. Together with Finance Minister Bozidar Djelic, Dinkic has pushed through the tax cut (among other reforms). The combined strategy aims to bring more money into government coffers, as well as revitalize the private sector and foreign investment.

From July 1, Serbia now offers investors an evenly graduated sliding scale transactions tax system, with relatively low rates. On transactions of 100,000-500,000 dinars ($1,600-$8,000), the tax is 0.45 percent, dropping on a sliding scale to 0.30 percent on transactions of more than 5 million dinars ($80,000).

Approximately one-third of this tax goes to the National Bank, the other two-thirds to the Ministry of Finance. Technocrats Dinkic and Djelic hope that this tax liberalization will encourage both foreign investment and domestic use of banks. By lowering (and hopefully broadening) the tax base, they hope to pull in more tax money overall.

Tax cuts make everyone happy. A more controversial reform has been bank consolidation. In January, Dinkic foreclosed on the outstanding debt of the four largest banks in Serbia -- in effect, closing their doors for business. These banks -- Beobanka, Beogradska Banka, Jugobanka and Investbanka -- had a tarnished legacy. Former President Slobodan Milosevic regularly forced them to loan to his cronies. These businessman, allegedly well-connected with the violent Serbian underworld, have long defied their creditors. The government has not yet formulated a collection scheme. It is likely, insiders say, that these bad loans will largely be written off.

On March 26, National Bank Vice-Governor Radovan Jelasic explained to the Financial Times the government's philosophy. In Croatia and Slovenia, banks had been "nursed expensively back to health." In contrast, Jelasic said, "from all the different bad experiences (elsewhere), we decided it's too long, too expensive (to rehabilitate the banks)... let's just do it the shorter, although bloodier, way."

And indeed they did. But Djelic and Jelasic were also prepared. Within 10 days of the January closures, their overture for appeasement materialized, in the form of the Nationalna Stedionica. First of all, this super-bank compensated customers of the four closed banks, and then started performing the duties of its dismantled predecessors.

Initially, protests came from the entrenched, mid-level bureaucrats and laid-off employees. But these dissenters soon melted away. More formidable critics of the reforms, however, have emerged.

Take Branko Dragas. With 18 years of banking experience in Serbia, this respected banker, author and analyst is intimately aware of the situation. In 1990, Dragas presided over the first privately owned and operated bank in all of central and eastern Europe, Karic Brothers. In 1992, he opened -- with his own assets -- his own bank, Credibel.

While he agrees with the tax cut on financial transactions, Dragas maintains that this is not enough, and that other reforms are counterproductive. Citing pragmatism over national pride, he believes that the euro (and dollar) should be tolerated. Allowing foreign currency accounts and transactions "will move money into the economy faster, so that citizens will not hoard it at home ... interest rates will also fall, by themselves, if citizens just put more money -- of whatever currency -- into the economy."

Dragas would also like to see tax liberalization for foreign banks: "The six foreign banks now operating in Serbia are very conservative. They don't know what to do with their money. They take the savings of the citizens and store them in branches abroad -- this money is funding other countries!"

To remedy this, Dragas proposes a drastic reduction in the foreign banks' tax payments to the national bank. He also maintains that a 2-5 year tax exemption for new foreign investors, coupled with reduction of bureaucracy, would mean a windfall for the Serbian economy: "If investors could get established without initial taxes, and if they could register a company in only nine minutes, we could have 50,000 new companies within five years -- and the problem of unemployment would be solved."

On bank consolidation, however, Dragas and the technocrats are in agreement.

Two years ago there were 105 banks in Serbia. Today there are 48. Says Dragas, "Serbia needs only 10 banks, but those which can offer complete banking services ... we cannot make the same mistake as Croatia, which sold 95 percent of its banks to foreigners."

It remains to be seen whether the government will adopt such suggestions. However, Zoran Djindjic's recent declaration -- that the state will first sell off 4,500 small to mid-size companies -- comes as a personal vindication for Dragas, who has long argued for such an action.

Despite their disagreements, both sides have fundamental similarities. Reducing the tax on financial transactions, creating all-purpose banks, and selling off the small fry all have one thing in common -- a desire to broaden the tax base, diversify the economy and encourage economic participation from both foreigners and locals. Since sudden reform tends to be politically damaging, Serbian leaders are banking on slow, incremental improvements that are unaffected by political change. This does not mean, of course, the cessation of the intrinsic politico-economic connection: insiders speculate that the government will introduce it's "glitzier" and more popular reforms right before elections take place, sometime in the fall.

Source: United Press International By Christopher Deliso

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