Following the London Club deal in June 2004 that eliminated nearly 62% of Serbia's debt with this private banks circle, Prime Minister Kostunica triumphantly declared that the deal gives Serbia "credit rating, that will give the domestic firms an opening to the world's capital markets". Thank goodness for Kostunica and his Finance team, no one noticed at the time that it is the state and not the Serbian firms that got the credit rating.

Now, less then a year later, Serbia has skillfully put to use its acquired credit rating to borrow over $1 billion on top of accrued interest arrear accumulated on late payments of the existing debt principal. The Belgrade spendthrifts have thus ballooned Serbian debt from just above $12 billion to $14 billion in less then a year.

Finance Minister Mladjen Dinkic has, of course, made a consoling spin that the debt level is sustainable and that it makes Serbia a medium level indebted country citing Turkey as an example of a drastic case where debt levels are nearly 80% of the Gross National Product (GNP). Foreign lenders are, however, not interested in the debt level against the GDP but against exports because the larger the exports, the larger the ability of that country to service its debt.

Sensing Dinkic's weakness, his namesake and also an economist, Mladjen Kovacevic, recently launched a public campaign of attacks on Dinkic and his Finance Ministry collaborator from G17 Party, Miroljub Labus, accusing them of cutting bad debt forgiveness deals with lenders last year and ballooning the Serbian debt since then: “On the basis of foreign loans last year, Serbia has gone into debt of two billion dollars in long term credit and four hundred million in short term, most of it, about a billion dollars, in October and November,” he wrote.

While, just like Dinkic, very short on solutions, and in the midst of the accusatory frenzy so fashionable in contemporary Serbian public discourse, Kovacevic manages to diagnose the future dangers that plague 90% of countries who have had extensive dealings with foreign lending institutions: "[T]here is danger that in upcoming years [Serbia] will continue with easy borrowing of 'very favorable' loans that will in 2-3 years bring in a debt crisis" writes Kovacevic.

Serbian trade trends from January 2000 to January 2004 mark a steady export level and an increasing imports component causing an increasing deficit which drains foreign currency out of Serbia. Serbia's foreign trade deficit is $7.43 billion.

Both Dinkic and Kovacevic, therefore, agree that the root cause for alarm over the debt is Serbia's ever-increasing trade deficit. Serbia imports more then it exports and to pay for the purchase of foreign goods individuals use foreign currency. This drains the foreign currency reserves in the Serbian Central Bank so when the government must write a check to the lender that borrowed them money, the Central Bank does not have enough to cover the payment.

To solve the lingering exports problem, Serbia might want to depart from economic advice that IMF "experts" are rendering to it. Most notably, Serbia should depart from IMFs insistence that Serbia floats its currency around some anchor and as a result must constantly manage people's income instead of production.

IMFs 'Scientific' Hoax

The Bretton Woods Conference created the IMF in 1944 in order to provide temporary help to nations in order to maintain their currency's fixed exchange rate to the dollar, then the world anchor currency. Bretton Woods system of fixed exchange rates collapsed in 1971 so presumably the reason for IMFs existence also ceased.

However, IMF begun "seeking to reinvent itself" since then and in 1989 IMFs director announced the institution's new mission of economic mercy to the world: to help the poor nations by providing their government's with loans to be used to stimulate economic growth.

In February IMF and Serbia " have reached an agreement on the implementation of the agreed policies last year, and made a positive assessment of the measures taken by the Serbian government and the National Bank of Serbia (NBS) late last November". Novemebr is when Serbia acquired most of the debt.

Frequent news that Serbian government is in talks with IMF or has concluded them or their delegations are in talks has no mystical quality but rather a sinister one because it demonstrates Belgrade's preference for IMF because IMF lends to governments and is not obligated to disclose the details of its deals to the public. It should be of no surprise then that once Serbia got the private bankers in the London Club and governments in Paris Club off its backs, it turned to IMF for borrowing.

Granted, World Bank was also in the lending mix in 2004 and its dollar dispersion to Serbia, close to a billion, was attached with legislative "reform" strings; but economic strings are also attached to IMFs deals and all of them are designed to assure that the borrower can repay its debt, not necessarily grow peoples income or their standard of living.

How does the IMF persuade governments into borrowing?

IMF believes in, by now, an elaborate mathematical equation based on a Harrod-Domar economic growth model which states that growth in GNP this year is determined by the amount of investment made into the economy last year. According to this model, the higher the investment rate higher the growth in GNP.

In a 1957 Evsey Domar penned The Essey in the Theory of Economic Growth where he expressed an "ever-guilty conscience" over the theory and disavowed it.

Since some countries, like Serbia, do not have enough money saved in its banking system to finance the desired growth level necessary to pay off debts, an outfit such as IMF exists to finance the "gap" that exists between the available savings and "necessary investment". In other words, IMF uses a Harrod-Domar economic model that its author believes is a hoax, to determine "required investment" which by default is greater then available savings a client country has. This supposedly scientific conclusion is presented to politicians disinterested in it but eager to get hold of the money while the public, charmed by well dressed bankers with the pedigree of importance, get mystified by the cryptic economics jargon.

The "required investment" nonsense Lord Bauer summed up the nonsense behind lending programs best:  If all conditions for development other then capital are present, capital will soon be generated locally or will be available... from abroad... If, however, the conditions for development are not present, then aid... will be necessarily unproductive and therefore ineffective.

The economic hoax by IMF is so elaborate that they even indoctrinate economists into this fictitious economic model by training the economists from client countries in how to calculate the "required investment". In Serbia, one hears the "required investment" in every economic circle be that the Economic Review published by the Central Bank or more recently by the Serbian Minister of International Economic Relations Milan Parivodic declaring at the US Chamber of Commerce in Serbia that the "conclusion of the Serbian government [is] that it would need this year two billion euros of foreign investments" to sustain its growth.

Serbia since the "October Revolution" in 2000

One of the tasks the post-Milosevic government did was to calm the inflation in Serbia, stabilize the currency and make it convertible. Since Milosevic and his posse have decimated the banking sector, no significant monetary transmission levers existed in Serbia that would quell the inflation except the exchange rate between Serbian currency, the dinar, and the predominant German mark.

Dinkic then dully anchored the dinar against the currencies and began to manage the float with no pre-announced path for the exchange rate. The managed float system stabilized the inflation and was used as the primary control mechanism of the country's money supply.

Demonstrated legacy of debt Serbia's predecessor, Yugoslavia, got a first IMF loan in 1949 and was a borrower in all but 3 of the succeeding 41 years and along with India, Brazil, Argentina and Mexico made up the largest club of borrowers at the IMF. In 1990, IMFs director declared that the fund is engaged in Yugoslavia supporting "a comprehensive and bold program to stop inflation in its tracks and reform the economy over the medium term." Economists Jeffrey Sachs and David Lipton  characterized this engagement as devastation that was to "cause Yugoslavia to drift from high inflation into hyperinflation." Of 138 countries, cites William Easterly, "the financing gap approach fits only one country: Tunisia."  In 2004 Serbia had nearly two thirds of its private and government debt forgiven by the London and Paris Clubs but statistics indicate that Serbia is a likely candidate to again become a highly indebted country: total debt forgiveness of 41 highly indebted countries in 1989-97 period was $33 billion while their new borrowing was $41 billion and the new borrowing was the highest in the countries that got the most debt relief.

Meanwhile, Dinkic instituted a thorough banking reform thus acquiring additional levers for the control of the money supply, namely the very powerful required reserves. As the financial industry of Serbia expands it is assured that additional levers of monetary control will develop as well.

Since Serbia has additional means for control of its money supply the existing managed float system should be re-examined because, among many examples, a similarly managed currency system in Asia stimulated a large trade deficit and encouraged external borrowing. Thailand, Indonesia and South Korea, for example, maintained a pegged exchange rate, another non-market determined currency price, and had a large current account deficits that encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.

Indication is that non-market managed currency systems discriminate in favor of trade deficits and large borrowing. In other words, Serbia's managed float may be one of the disincentives against exports, and an overwhelming focus on income policy instead of a production policy.

IMF: We've tried, failed; let's do more of the same

IMF believes that managed float must be maintained because otherwise Serbia will plunge into hyperinflation. Since the result is the widening of the trade deficit that drains foreign currency and thus jeopardizes IMFs loan recovery, they demand that Serbia control its imports by controlling the wages. The pretext for managed float is that Serbian banking is underdeveloped while the wage controls pretext is that Serbia is still a predominantly state run economy so that market wages are negligible.

In other words, IMF demands that Serbia impoverish its own people so that they may stop buying foreign goods and use the foreign currency derived from exports to pay the debt they've loaned.

Of course, IMF favors privatization but not for the reasons of increasing productivity and expansion of the domestic market, but rather because the foreign company will export the product in the markets it is engaged in and bring the foreign currency into Serbia that will eventually be redeposited to the IMF account.

Pressed to earn foreign currency, Serbia is probably at that same brink its predecessor Yugoslavia stood in the 1980s prior to its collapse. Writes OECD in its Economic Survey: "The lack of an internationally convertible currency [to pay its debts] led the authorities to stimulate and subsidize industries that could earn hard currency revenue by exporting, irrespective of whether this was economically efficient."

In its January Report, IMF demands monetary tightening in Serbia to be done by "prudential measures to contain credit growth" although prudent lending not a tightening is more desireable. "Most of the tightening effect of this measure would arise from the marginal reserve requirement" claims IMF and not the management of currency value. So why not free float the Serbian dinar and eliminate the deficit?

By tolerating the $7.4 billion trade deficit, Serbia is, in effect, subsidizing those who benefit from artificially cheap foreign goods (retailers) and compensating for this vast transfer of wealth by borrowing abroad.

Serbia is still not pressed to directly subsidize any other industries on such large scale yet because it still has assets to sell to foreigners that it books as investment, but the "stimulate" part has been touted through the media all through the 2004. Stimulative preferential trade agreements are actively sought after throughout the world: the contraversial sugar deal with EU, free trade deal with Russia, auto deal with India, and in late March a textile deal with EU will also take effect. Alarmingly still is that some cirlcles are advising erection of bureaucratic barriers to trade, protectionism and artificial devaluations of the currency into some harder peg.

A significant problem in abandoning the managed float is the so-called "import lobby" - a vast retail industry that has developed in wake of absence of industrial production and veils political influence. Noticing the disparity between world prices and domestic ones, retail trade developed enormously and is a vital source of profits and employment.

Suppose Serbia adopts a free currency float and wipes the trade deficit away overnight: many of these retailers will suddenly go out of business because their imported products will become too expensive. The question Serbian politicians need to answer is why are they subsidizing the retail industry to the tune of $7.4 billion?... and is compensating for this enormous transfer of money to selected few by indebting and impoverishing the wage earners?