Problems with inflation are still waiting for us

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Serbia is entering a turbulent pre-election period, and the conflict in Ukraine is happening – we are not an isolated island, so all that can affect and lead to disturbances in Serbia. That is why we asked the former governor of the National Bank of Serbia and current professor at the Faculty of Economics Dejan Soskic for an analysis of how this will affect our market and lives – what will happen with the dinar exchange rate, market supply and prices.

We bring you the full text and analysis of Professor Šoškić:

Fixing the course is a matter of decision, that is. the choice of each country. This is not a success, as it is often misrepresented in our country, but a technical decision and determination of what kind of monetary policy the country wants to pursue. When the course is fixed, it needs to be a consequence of a serious professional analysis, to be done legally, ie. in accordance with national regulations, and to then align other economic policies with that decision. In our country, we started fixing the exchange rate a few years ago, without prior adequate expert analysis, without prior harmonization of our regulations in that regard, and without harmonizing that decision with other economic policies of the country. Such fixing of the exchange rate (against the Euro) is greatly facilitated by the fact that the Euro has been “printed” in huge quantities for the last seven years (usually 60 to 80 billion every month) and this has created a situation for all other currencies that are not so “printed”. It is important not to allow the domestic currency to gain in value against the Euro, because that will bring down the competitiveness of the national economy and the country’s exports.

Unfortunately, we also allowed that, ie. the dinar strengthened against the euro from over 124 to around 117.5. And this is reflected in practical problems, such as huge and often unjustified imports of agricultural and other products that practically stifle domestic production, but can also lead to the withdrawal of some foreign investors (Geox, etc.) or the absence of other export-oriented foreign investors. are otherwise the most desirable. The European Central Bank is slowly changing its policy, but for some time to come, the extremely large available quantities of the euro will enable relatively easy maintenance of the stability of the exchange rate against the Euro, and I think that nothing significant will change after April 3. However, the conflict in Ukraine could cause a drastic rise in energy prices and a possible significant withdrawal of capital from Eastern Europe.

And that can then create great overstrain and bigger deficits in our trade balance, with a possible withdrawal of capital at the same time. With the current chronic current account deficit of our country (which has not decreased in recent years because our competitiveness is not growing primarily due to inconsistencies in economic policies pursued in the country), it can then become a serious challenge for the sustainability of fixed exchange rates . Huge pre-election budget payments and freezing of prices will cause problems with inflation in the coming period.

If our inflation remains higher than inflation in the Eurozone, a fixed exchange rate without adequate productivity growth will only further bring down exports, ie. competitiveness of the domestic economy. However, the country’s foreign exchange reserves are enough to defend the exchange rate for a while and in such circumstances, but then the question of the sustainability of such a policy in the long run arises, Nova reports.