The dinar’s exchange rate has remained steadfast for two decades, upheld by the National Bank of Serbia’s (NBS) interventions in the interbank market to stabilize the currency. These interventions involve the buying and selling of foreign currencies, particularly during market upheavals triggered by factors like substantial inflows from foreign direct investments or increased remittances from abroad.
Despite the prolonged stability, economists argue that these interventions are unnecessary and that a more flexible exchange rate, determined by the market, would be advantageous. The International Monetary Fund (IMF), a significant lender to Serbia with a current precautionary arrangement, shares a similar viewpoint. In a recent report, the IMF acknowledged Serbia’s current exchange rate stability but suggested contemplating greater flexibility over time. The IMF stresses the importance of gradually transitioning to a more flexible exchange rate, aligning with the official inflation targeting regime, providing a crucial role in mitigating economic shocks.
Experts, including Professor Đorđe Đukić from the Faculty of Economics in Belgrade, propose that the NBS should signal its intention to move towards a freer-floating exchange rate rather than intervening in the foreign exchange market arbitrarily. This approach could eliminate debates about whether the dinar is overvalued or undervalued, providing more transparency for citizens.
Acknowledging the population’s sensitivity to exchange rate fluctuations due to past experiences with hyperinflation, Professor Đukić questions the rationale behind maintaining a fixed exchange rate. He argues that addressing issues such as monopolies and low productivity in the real sector should be the focus rather than relying solely on a fixed exchange rate.
Despite the exchange rate stability, Serbia experienced high inflation in the previous year, particularly in food prices. The NBS, in its reports, consistently highlights the stable dinar as a factor contributing to stability and the preservation of trust.
Professor Đukić emphasizes that there is no ideal exchange rate regime for all times but advocates for the introduction of a freely floating exchange rate for Serbia. He believes that, in the medium and long term, a policy of a real exchange rate would automatically align all economic actors, including policymakers, without the need for manipulating macroeconomic parameters to maintain a de facto fixed exchange rate.
Differing Opinions: Economist Slaviša Tasić argues that the IMF is beneficial for controlling consumption and structural reforms but often demonstrates a weaker understanding of monetary policy in Serbia. Tasić suggests that in a fixed exchange rate environment, the interest rate is ineffective as a tool for managing monetary policy, which is not a problem but a characteristic of a fixed exchange rate regime.
Given Serbia’s close ties to the euro in terms of its currency and monetary policy decisions, Tasić questions the importance of strengthening the interest rate as a tool and transmission mechanism, a point emphasized by the IMF in advocating for a more flexible exchange rate.
Tasić proposes that there is no need to separate from the euro or unilaterally adopt it, as Serbia is already highly integrated with the European market.
Advantages of a “Floating” Exchange Rate: Professor Đukić elucidates some benefits of a more flexible exchange rate, citing empirical analyses indicating that countries with flexible or freely floating exchange rates suffer less during global crises. Another potential advantage is the preventive impact on the “irrational” increase in debt, whether public or private. With a floating exchange rate, entities, including the government, corporations, and individuals, would be more cautious about borrowing due to the uncertainty of repaying debt under market-determined exchange rates.
In conclusion, the debate in Serbia centers around whether to maintain the long-standing stable exchange rate or transition to a more flexible regime. Economists and experts express differing opinions on the role of the NBS and the benefits of each approach, emphasizing the need to consider the country’s economic conditions and potential shocks in making such a decision.
