Yugoslav Dinar to be Exchanged for Gold

BELGRADE, -- It looks like a peasant's dream come true: the third bumper harvest in a row and the government playing the eager buyer with gold coins jingling in his pocket.

But the peasant's dream of getting gold for wheat and other food crops has the makings of an nightmare that could suck the country, already reeling from two years of United Nations sanctions, further into economic misery.

Only six months ago, Serbian-dominated Yugoslavia's economy was buckling under hyperflation and the UN embargo, imposed to force Serbia to push Bosnian Serbs into peace instead of fomenting the war.

The dinar currency was virtually worthless -- the largest denomination 500 billion dinar bank note was worth 10 Deutsche marks last December.

Then, seeming salvation. National Bank President Dragoslav Avramovic lopped a string of zeros off the old dinar to make a new "Super Dinar," pegged at one to the mark.

Reported budget austerity and throttling the money presses that used to feed inflation by spewing out increasingly worthless banknotes meant the rate held. Inflation for June was only 11 percent, according to some unofficial estimates -- officially, it does not exist -- compared to 200 percent in June 1993.

Ironically, that very fiscal discipline has led to the new spell of trouble. When time came for the state to buy 1.1 million tons of crops this year to guarantee minimum food stocks -- insurance against social unrest should Yugoslavia still be under UN blockade next winter -- the government found itself short of cash.

Last summer, the answer would have been easy. This year Avramovic, an 83-year-old economist and former World Bank official, stood firm. No new notes would be printed.

Instead, one third of the bill would be paid in cash and the rest in government bonds exchangeable for gold coins, or fuel, fertilizers and other goods.

"It's an extension of the currency," Avramovic said. "Nothing can go wrong with gold."

The coins, each weighing 7.78 grams and valued at 150 dinars ($94), will be minted by late July, he said. They will be legal tender.

Farmers, who last year kept back some 2 million tons of crops because of low prices paid in a virtually worthless currency, now are eager to sell.

"We'll gladly give all our wheat for gold," said Radisav Milenkovic, manager at Yugoslavia's largest food producer PKB.

But economists are skeptical, pointing out that the government is spending gold that it had used to back the Super Dinar. By depleting gold reserves, it is jeopardizing the hardness of the currency -- that, and the underlying weakness of Yugoslavia's communist-style economy, means disaster, they warn.

"If that means the gold is used twice, then we can only have rampant inflation again," wrote Aleksandra Milutinovic in the independent weekly Vreme.

Ljubomir Madzar, an economist, said he would tear up his university diploma if Avramovic's program survives this fall. He claimed real industrial output would be about half of the 10.4 billion dinar government estimate.

Problems already are apparent. Government officials claimed 17 percent economic growth in the first quarter but now acknowledge that output has shrunk 6 percent since May -- not unexpected in a country with no legal export markets, high unemployment and cash-strapped consumers.

Under the Avramovic program, an estimated 900 million dinars were granted to mostly state companies to restart production. But firms are having difficulties repaying debts, causing a further cash squeeze in the banks.

"When I see saving accounts getting filled with dinars, only then I will believe the program can work," Madzar said.

The Yugoslav banking sector is said to be on the verge of insolvency. State firms based abroad have been urged to repatriate foreign currency to boost reserves, banking sources say.