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