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Yugoslavia Table of Contents

Yugoslavia

Foreign Exchange

Because Yugoslavia's industrial strategy did not stress exports, few domestic enterprises were established to satisfy export demand. This meant a scarcity of foreign exchange throughout the postwar years, especially in the 1980s. Such a condition presented two major problems: allocation of scarce foreign exchange reserves and maintaining a balance of payments.

The Yugoslav government experimented with various ways to allocate foreign exchange. Until 1986 the retention ratio system allowed exporters to retain only a share of their foreign exchange earnings, requiring the rest to be handed over to the National Bank. This system created much discontent because enterprises that generated a considerable amount of foreign currency frequently had to apply for administrative allocations, which they frequently did not receive. At the same time, because Slovenia and Croatia earned much of Yugoslavia's foreign currency, the retention ratio system allocated larger proportions of the receipts to those two republics. This exacerbated disparities in economic development and nationalist conflicts between the richer and poorer republics. Moreover, allocation from above conflicted with the principle of independence inherent in self-management.

A new system established in 1986 was directed toward establishing a free market in foreign exchange. All foreign exchange receipts were to be surrendered to authorized banks at official exchange rates. Enterprises needing foreign exchange to pay for imports then applied to the banks, which determined the amount each enterprise needed by its use of foreign exchange the previous year and export performance in that year. This system never worked because there was never enough foreign currency to satisfy demand.

In 1987 the government tried to apply a law under which foreign exchange was allocated by a system of functional priorities. The top priority was the servicing of foreign debts and other foreign contracts. This was followed by needs of net exporters, priority needs of federal agencies and organizations, imports of fuel, and, lastly, imports of consumer goods. To compensate firms for their loss of retention rights, the federal government set up a system of export subsidies. This system destroyed incentives to export, which in turn cut the influx of foreign currency. In 1987 the Yugoslav government failed for the first time to pay interest on its foreign debt. As part of its agreement in May 1988 to reschedule Yugoslavia's foreign debt and provide new loans, the IMF forced the Yugoslav government to relax foreign exchange controls and open an effective foreign exchange market. Foreign exchange reserves amounted to US$7.5 billion in early 1990.

Data as of December 1990