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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
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