The National Bank of Yugoslavia

This Bank is the central bank, the bank of issue, and the bank of the Federal Government. It is charged with the tasks of maintaining the country’s monetary, credit, and foreign exchange system and of implementing official monetary and credit policies in accordance with the requirements of internal and external stability. It is responsible to the Federal Assembly and the Federal Executive Council for the performance of its duties.

The social investment funds

These funds (federal, republican, and communal) represented a transitional phase in investment financing between budgetary investment grants and investment banking. In 1962, when the banks were allowed to introduce time deposit accounts for economic organizations, the basis for investment credit operations by the banks was created, and at the end of 1963 the most important investment fund, the General Investment Fund, was liquidated. In 1964-65, the other social investment funds were abolished; the governments retained control of the resources of some of these funds, investing them through extrabudgetary accounts.

The federal specialized banks

The Yugoslav Investment Bank was established in 1956 to handle investment credits to public projects and to economic organizations. It administered the main part of the resources of the General Investment Fund. The Investment Bank also deals with the international development credit institutions and other sources of long-term foreign credits. When the General Investment Fund was liquidated, the Investment Bank took over the main part of its assets and liabilities.

The Yugoslav Bank for Foreign Trade (Jugobanka) was established in 1955. Obtaining its resources originally from federal grants and credits, and later from deposits and from foreign borrowing, this bank grants short-term credits for foreign trade operations. It also grants long-term export credits, either from its own or federal resources, and credits for the development of export industries.

The Yugoslav Agricultural Bank, established in 1959, grants investment credits and, in special cases, short-term credits to the socialized agricultural sector. The resources of this bank were obtained from sources similar to those of the other federal specialized banks.

The republics’ banks

These banks (six—one for each republic) were established in 1961. They are mainly responsible for investment credits under each republic’s development policy, and they obtain their resources from deposits, credits, and grants from republican government bodies and institutions.

The communal banks

The first of these banks were established in 1955, and at the beginning of 1965 they numbered 206. They are authorized to accept deposits from economic organizations, communal and social bodies, and private persons, and they grant short-term and long-term credits subject to general credit regulations and National Bank guidelines. Until they were abolished (and taken over by the banks), the communal investment funds were technically operated by the communal banks.

The Postal Savings Bank

This bank accepts savings deposits and operates a postal giro system; it does not grant credits, and its resources are deposited with the National Bank of Yugoslavia.⁴

Insurance institutions

These institutions (providing life, fire, and other types of insurance) and the social insurance funds do not grant direct credits but keep their reserves in bank deposits.

Joint reserve funds

These funds of the economic organizations, established at the republican and communal levels in 1962, obtain their resources from obligatory contributions from members. They grant credits to economic organizations that are facing temporary financial difficulties; bank credits are not available for this purpose if the economic organization concerned is operating at a loss.

The Social Accounting Service

This Service, in cooperation with the National Bank, is responsible for the bookkeeping and giro accounts system and for financial control within the socialized sector. It maintains about 400 branches. It is not involved in credit operations.

The Council of Banks

This Council is an advisory body on banking and related issues, such as interest rates. Its membership consists of the managing directors of all banks established under federal or republican law and one representative for each category of bank in each republic. The Governor of the National Bank is President of the Council.

General policy developments

In the period of centralized economic control, the authorities paid relatively little attention to the problem of monetary equilibrium; compared with the hectic reconstruction effort, relative cost-price stability and strengthening of the balance of payments position were not seen as particularly urgent objectives. Moreover, no monetary problem was seen to exist (apart from technical difficulties) within the socialized sector; between units of that sector, money was regarded as a mere medium of accounting and of plan implementation. The monetary problem was regarded as limited to the demand for socialized sector output arising from money incomes of the population; there a simplistic “quantity approach” prevailed in the form of the so-called ticket theory (see pp. 572-73); although such monetary measures as were applied were supplemented by rationing, price regulation, and “grey markets,” gross imbalances in the consumer market were recurring, and the rate of inflation was high. It was, in fact, obvious under the circumstances that monetary policy had a secondary national priority as long as a runaway inflation was avoided.

Following the introduction of workers’ councils in the economic organizations in 1952, the National Bank began to include the giro (current) account balances of the economic and other self-managed organizations in the money supply, thus recognizing that movements between the accounts of the economic units were no longer internal transfers within a state sector but actual transfers of moneylike resources between autonomous economic units; (it was still true that an economic organization could use balances on its different “giro” accounts only for certain specified purposes). During this period, the importance of variations in the liquidity preferences of economic organizations and individuals was recognized. More detailed studies and estimates were made about the velocity of circulation, and indicators were sought that would allow the monitoring of the autonomous development of the monetary situation with a view to determining appropriate monetary and credit policy. However, the instruments of policy remained administrative and often involved detailed microeconomic regulation. This was not due to any doctrinaire objections to the general instruments of monetary control, but to difficulties in using such instruments under the conditions that then prevailed in Yugoslavia. Ambitious investment programs were implemented to achieve rapid industrial growth, and, despite administrative intervention in price formation, it was difficult to maintain sufficient price stability to make the interest rates on credits and deposits a meaningful instrument of monetary policy. Moreover, there was the almost complete lack of institutional arrangements providing for near money and money substitutes; this lack prevented a meaningful choice for the economic units in the liquid and near-liquid part of their asset scales. Time deposit facilities for the economic organizations were created only in 1962. Experiments with government bonds⁵ were made, but it remained difficult to provide bond yields attractive enough in real terms to create interest in a securities market. The mobility of money and capital was further restricted by regulations prohibiting credits between the economic organizations, by additional institutional factors,⁶ and by “regionalism” in banking and commercial practices. However, in 1965 a national credit market was established (see pp. 586-87).

Operating under such circumstances, the monetary authorities resorted to an important extent to detailed regulation of the liquidity of the economic organizations. This was done by requiring that each economic organization maintain separate bank accounts for different components of their financial resources (differentiated according to the source of resources and to the permissible uses of each component). All economic organizations had to keep at least four separate bank accounts (complex firms had to maintain up to eight accounts), each being restricted to certain uses under specific regulations. While one of the accounts was effectively a current account for commercial transactions, some accounts would be virtually blocked for specified periods. In some years blocking and deblocking of restricted deposits of the economic and other organizations was, in fact, a more significant factor in the development of money supply than changes in the volume of credit.

The maintenance of detailed control by means of earmarked dinar flows was matched by the retention in the credit system of some characteristics of centralized management. A credit plan, formulated as part of the annual social plan, still guided the policies of the National Bank. The credit plan contained quotas for each type of bank credit. The credit plan was implemented by issuing detailed qualitative regulations on the kinds of credit that could be granted to borrowers who fulfilled specific requirements. If a qualifying borrower requested a bank credit for a specific purpose defined as acceptable under the regulations, the credit was granted automatically; if the bank from which the credit was requested did not have sufficient funds, the National Bank provided the necessary rediscount or other credits.

The automatic granting of all qualifying requests for commercial credit (implying short-term bank financing of routine commodity transactions between economic organizations) suggested that the central bank undertook to finance production and trade without imposing a specific limit or quota; the credit plan contained an estimate for these credits, but it was interpreted as a noncritical component. No strict restraint on these credits was considered necessary because they were merely a catalyst of the production-distribution process. Such credits, it was argued, did not affect monetary stability because each credit was self-liquidating: bank credit was understood as a neutral adjustment of working capital to the level required for a given volume of commodity transactions. Thus, the entire production-distribution process could always be fully financed without inflationary effects as long as such credit was promptly repaid when the corresponding commodity reached the final expenditure⁷ stage and was paid for from realized income.

This approach obviously had its roots in the period when fully centralized planning had been attempted. Under the presumed centrally planned conditions, a unit of the nationalized economy could apply commercial credit only within its planned and controlled production and distribution activities, and its costs, prices, and own working capital were all planned and controlled. If the unit followed the plan and accounting regulations, it could not usefully apply any excessive credit, and while short-term credit temporarily boosted the unit’s bank deposits, this did not autonomously lead to any additional bank lending.

Under the conditions described, and provided that velocity of circulation developed in line with estimates, money paid to factors in the production-distribution process could be thought of as tickets entitling their recipient to a measured share of output. Apart from problems arising from, e.g., production of unwanted goods, the assumption was that generally the total planned supply was achieved and sold at planned prices. Short-term credit was repaid, and another production cycle started. Growth of production capacity could take place when the supply of final goods was planned so that it contained a certain amount of investment goods, the tickets for which were retained by the state and represented saving.

The argument about the self-liquidating nature and monetary neutrality of commercial bill financing (the real-bills doctrine) first appeared among studies on money under capitalism at the beginning of the nineteenth century; its critics, discussing conditions in a market economy, demonstrated that the assumptions involved were connected with cyclical and institutional circumstances that were exceptional rather than general.⁸ Adapted to conditions prevailing in a totally centrally planned economy, the real-bills approach would theoretically not be threatened by unplanned price and volume shifts in production as a result of cyclical or speculative influences or uncoordinated public sector impulses. Problems would, instead, arise in the technical implementation of total planning. In Yugoslavia the question whether or not such planning conditions were feasible at all had already become irrelevant. After the initial decentralization steps, the Yugoslav authorities in the early 1950’s faced circumstances in which the unlimited central bank financing of commercial bills contributed clearly to persistent demand management problems. Moreover, the production and marketing conditions were confused by bottlenecks, shortages, physical rationing, and various residual effects of the centralized control era in the form of detailed administrative regulation and intervention.

Under such circumstances, economic organizations were not always able to adapt their production and costs to the market conditions; many economic organizations operated at a loss, others failed to realize in full the production for which they had obtained short-term credit, and such economic organizations were unable to repay advances extended to them. Although the financial independence of the economic organizations was already increasing rapidly, intensified attempts had to be made to effect administrative control of credit needs and use of borrowed working capital through the Social Accounting Service, at a heavy administrative expense. Further, the private sector production of goods and services was relatively extensive. It was not feasible to enforce plan economy to the extent that consumers would have been induced to spend their incomes according to the plan’s intention: not only could they refuse to buy some of the output but also, through their transactions within the private sector, they could raise their income velocity and the velocity of currency in circulation above the planned rate; each of these discrepancies had repercussions on payments schedules within the socialized sector and, under the open-ended commercial credit policy, reduced the effectiveness of monetary control. Instability resulted from inadequate information regarding the liquidity preference of the public, and from the fact that the balance of payments position did not permit flexible import interventions to smooth out unexpected fluctuations of shifts in consumer demand.

The Yugoslav authorities recognized that, with the decision to give economic independence to enterprises, a shift away from detailed administrative planning and control of money and credit had to follow. They initiated a series of methodological, institutional, and policy changes aimed at realistic and comprehensive monitoring and control of monetary equilibrium. These changes were simultaneous with the introduction of a mixed economic system: planning of the macroeconomy and control of the microeconomic operations, mainly through general “guiding” instruments and only exceptionally through direct regulation. The new arrangements placed a high degree of reliance on the market mechanism in respect of production, prices, income distribution, consumer spending, etc. As the process of decentralization progressed, the system of financial intermediaries developed rapidly, the business sector (although it remained a part of the nationalized economy) began to hold money and quasi-money in a meaningful way, all-Yugoslav money and credit markets began to develop, and the indirect monetary controls—notably the rediscount and reserve ratio policies of the central bank—started to assume their role as key instruments of economic policy. In order to combine the advantages of decentralized economic decision making with the degree of monetary stability that was deemed essential for sound expansion of output and growing participation in international trade, the following improvements were seen as prerequisites for the effective use of the new monetary instruments:

(1) Liberalization of the use of resources within economic organizations (economic decentralization);

(2) Decentralization and indirect control of the banking system;

(3) Improved price stability;

(4) Introduction of an assortment of financial assets to give economic units, including individuals, a meaningful choice of assets;

(5) Development of an interbank money market and of direct links between commercial banks and foreign banks;

(6) Development of a viable capital market.

Substantial progress toward these goals has been made in the context of the reform of the banking and credit systems since 1965. This is described below, starting on page 579.

Control of commercial financing

During the period of initial decentralization, one of the most persistent problems in the Yugoslav economy was the appropriate financing of the working capital of the economic organizations. Under centralized economic control, the basic working capital had been formed from budgetary grants. When new economic organizations were established in the later years, the organizations, social bodies (often communes), and groups of individuals founding the economic organization had to put up an initial allocation for permanent working capital, in addition to a basic sum for investment in fixed assets. Working capital was then to be augmented in proportion to the expansion of business by allocating a part of the net income to the working capital fund.

Under the conditions and institutional arrangements that prevailed before the economic reform in 1965, the economic organizations consistently proved reluctant to increase their working capital. The main reasons were the low cost of borrowing in real terms⁹ and the ready availability of short-term bank credit for commercial transactions, seasonal stocks, etc. Moreover, there were practically no interest-yielding financial assets in which the economic organizations could have invested their owned working capital when this, for seasonal or other reasons, was not required for inventory financing. Under these circumstances, not only were financial assets unattractive investments but also there was little incentive to economize on borrowed working capital.

While the authorities recognized the need for reforms and improvements in price formation, interest mechanism, and monetary institutions, these were complex tasks requiring years to implement. In the meantime, it became necessary several times to resort to administrative measures and detailed controls to force the economic organizations to allocate adequate funds to their working capital and to economize on bank credit. Among these efforts was the tightening of accounting controls on the use of working capital, implying that if the demand deposits of an economic organization were large according to established criteria, or if it used its different accounts contrary to regulations, no short-term bank credit was made available to it. Further, detailed regulations were introduced on the required allocations of net income to working capital, including stipulations on rechanneling a fixed proportion of allocations for fixed investment to working capital. The authorities repeatedly took steps to prevent short-term bank credits from being used for investment in fixed assets.

While the basic automaticity in providing credits for commercial transactions was maintained during the period of initial decentralization, the system of qualitative control of credit and of the credit-worthiness of the borrowers was gradually refined. Various shortcomings could not be eliminated completely, but the qualitative credit controls became more effective. By the late 1950’s a detailed set of minimum reserve requirements for different categories of bank liabilities had been established; the ratios were adjusted from time to time but were used only to supplement the basically qualitative system of credit control. Another development was a gradual decline in the role of blocking and unblocking of certain types of account of economic and social organizations; while this instrument was not abolished, less use was made of it because it was difficult to operate smoothly and equitably.

The National Bank

This Bank has fundamentally the same functions as before (see p. 567). The National Bank of Yugoslavia Law, 1965 determined the Bank’s powers and responsibilities in more detail than previously. The National Bank is responsible to the Federal Assembly and to the Federal Executive Council. As a general principle, the National Bank is independent in the performance of its tasks, but with regard to certain key policy instruments the National Bank Law reserves final decision to the jurisdiction of the Federal Executive Council. The National Bank’s operations are supervised by the Federal Secretariat for Finance.

Specifically, the National Bank may grant only short-term credit to business banks for purposes determined by federal regulations, and the resources from which the National Bank may grant credits are determined by the Federal Executive Council. The Federal Government’s borrowing from the National Bank is determined under federal law. Moreover, approval is required by the Federal Executive Council for decisions regarding ceilings on central bank credit to business banks and for regulation of the minimum share of business banks’ credits, which must be repayable within three months. The Federal Executive Council, on proposal of the National Bank, determines the interest rates for credits granted by the National Bank. A major instrument not subject to direct government control is the minimum reserve requirement, for which, however, a maximum ratio is established in the National Bank Law. Details of these and other instruments are described below in Section III, pages 588-91.

Business banks

These banks are investment, commercial, or “mixed” (investment-commercial) banks. All business banks are controlled by the economic organizations and other bodies that have invested in the banks’ initial credit funds (capital). The business banks were established in the following ways.

The three previous federal specialized banks, the six republican banks, and the two banks of the autonomous regions were formed into investment banks controlled and financed by the economic organizations and the governments concerned, with the exception that the Foreign Trade Bank was reorganized into a commercial bank.

The previous communal banks were transformed into commercial or commercial-investment banks. At the same time, mergers between communal banks took place, so that the total number of banks has declined.

A number of new commercial banks were established mainly by groups of economic organizations. No savings banks have yet been established under the new regulations. During the adaptation period following the banking reform, some further mergers of banks took place. In January 1969 a total of 69 business banks were in operation. The number of branch units of business banks has continued to rise.

The Postal Savings Bank and the Joint Reserve Funds

These institutions continue to operate as before. The Council of Banks has also been maintained under the new legislation.

The National Bank

The National Bank performs its tasks independently but in accordance with federal laws and regulations, as described above. The obligations of the National Bank are guaranteed by the Federal Government.

Business banks

Any group of economic and sociopolitical organizations and, for savings banks, private persons may establish a bank. The sponsors of the bank must provide it with a sufficient initial credit fund (capital). Minimum credit funds for the various types of bank have been established by each republic, subject to federal minimum requirements.

The highest administrative organ of a business bank is its assembly, appointed by the participating economic and social organizations and governmental bodies. Each participant is represented in proportion to its contribution to the bank’s initial credit fund and its deposits in the bank. The assembly must have a minimum of 25 members and each member at least one vote. The maximum voting power of any one participant is limited to 10 per cent of the total vote in the assembly. A special voting quota in the assembly is reserved for the working community (personnel) of the bank; the quota is fixed in the bank’s statutes.

The assembly appoints a board of management and a director to supervise the bank’s day-to-day business. Decisions on requests for credit are made in accordance with general credit regulations by a credit committee consisting of members of the bank’s staff but subject to control by the assembly.

The credit fund

This fund represents the sponsors’ investment in the bank and entitles the participants to a share in the net income of the bank (interest on the credit fund). There are no legal provisions for the withdrawal of a contribution to the credit fund, but the rights derived from such contribution are transferable. Further subscription with equal voting and other rights may be made at any time, and the voting rights are recalculated annually.

Time deposits

These deposits are placed with the bank under a contract for a minimum term of three months. Certain time deposits give the depositors voting rights in the bank’s assembly (see p. 585). Regulations on compulsory time deposits or blocked deposits must be promulgated by federal laws.

Sight deposits

These deposits are made by the economic and sociopolitical organizations.

Savings deposits

These deposits by the public are accepted by the commercial banks and will be accepted by the savings banks when they are established. The Postal Savings Bank also operates in this field. Savings deposits and interest on them are tax exempt, and the deposits are guaranteed by the Federal Government. The Federal Executive Council may prescribe the minimum interest rate payable on savings deposits payable at sight.

Funds acquired by issuing bonds and other securities

The issuance of and trade in such securities are regulated by the Federal Executive Council.

Governmental resources for investment in the economy

These resources accrue mainly from repayments of credits granted under the previous social investment fund regime. Although such resources are generally channeled through the investment sections of the banks, the governments concerned retain authority to earmark these funds for investment in specific branches or individual projects. About one third of the investment funds’ resources were transferred to governmental extrabudgetary funds for specific investment purposes.

Foreign borrowing

Previously, foreign borrowing was generally transacted through the National Bank and the federal specialized banks. From the beginning of 1967 commercial banks and economic organizations have been permitted to borrow abroad directly, subject to specific regulations.

Borrowing from the National Bank

Subject to a number of limitations, central bank financing of short-term credit is available to all business banks that fully observe the National Bank’s credit directives.

Transfer to the credit fund

Increases in the credit fund paid from a bank’s profits are “anonymous” in the sense that they do not change any organization’s voting rights in the bank’s assembly.

Transfer to the special reserve fund

This transfer must amount to at least 0.2 per cent of the total of credits granted by the bank during the accounting year. The special reserve fund may be used only to write off uncollectible credits, or to prevent the bank from becoming insolvent; in the latter situation, the special reserve funds used must, in principle, be repaid by the end of the accounting year.

Transfers to the funds that are distributed by the banks’ working community

These include gross payments to the personal incomes fund and transfers to the fund for general consumption, the business fund, and the obligatory reserve fund. Disbursements from the personal incomes fund include net personal income payments as well as taxes and contributions payable on the personal incomes. The fund for general consumption finances mainly various fringe benefits for employees.

Interest payable to participants in the bank’s basic credit fund

The interest (if paid at all) depends on the bank’s business results and reflects the yield from the initial capital input (contributions to the credit fund) of the bank’s sponsors.

Extra interest on long-term deposits

The basic interest rate payable on time deposits is stipulated in each deposit contract. Time deposits tied for a period of three years or longer provide specified voting rights in the bank’s assembly for the depositor, and, therefore, a bank’s successful operations are to be reflected in the total interest paid on such deposits. This is done by paying extra interest, which is determined for each accounting year on the basis of final business results.

If a bank operates at a loss, the participants and the staff, as the responsible management of the bank represented by its assembly, are expected to take appropriate measures to maintain the bank’s liquidity and to restore normal operations. When such action is necessary to maintain the bank’s solvency, its sponsor organizations must provide it with necessary credits or invest additional capital resources. The bank’s statute must contain specific regulations on the sponsor’s responsibilities in this respect. If a bank, despite such measures, continues to operate at a loss, or is, and on reasonable prospects will continue to be, unable to meet its commitments, it must enter into liquidation. The Federal Government and the National Bank are under no general obligation to rescue business banks if these are unable to meet their obligations (regarding savings deposits, see p. 582); in some banks, as indicated earlier, the Federal Government has the role and the limited responsibilities of a participant.

General regulations

The new regulations on granting short-term credit abolished most of the previous qualitative controls. The rule that short-term credits could not be used for financing investment (including investment in permanent working capital) remained in force. The main guidelines for a bank’s lending policies and lending terms were established by its assembly and management board. In implementing these policies, the management had to take into account particularly the bank’s liquidity position. The applicants for credit still had to prove that they had fulfilled the current temporary requirements for increasing their working capital, using for that purpose a part of the funds that ordinarily could be used for investment in fixed assets. It was up to the bank to judge whether the applicant was making satisfactory use of its working capital. In contrast to the previous qualitative control system, the bank was free to refuse credit, even if the applicant fulfilled all remaining formal requirements.

The maximum interest rate was increased from 8 per cent to 10 per cent, and the maximum repayment term was shortened from 12 months to 10 months.¹⁵ A degree of competition between banks has developed in the interest rates offered on time and sight deposits.

During the transition to the new credit policy instruments, consumer credit was specially restricted to 70 per cent of savings deposits; subsequently, this rate was raised to 90 per cent, while the banks were directed to use the equivalent of 10 per cent of their saving deposit liabilities for granting housing credits. Potentially, the Federal Executive Council may permit the granting of consumer credit even on the basis of liabilities other than savings deposits. The new credit regime also provides for consumer credits granted by economic organizations. All types of consumer credit are subject to general directives issued by the National Bank. At present, these impose a ceiling of Din 10,000 on individual indebtedness; within this maximum the total outstanding must not exceed one third of the borrower’s annual income. There is, at present, no prescribed minimum downpayment.

Recourse to National Bank credit

Credit ceilings. Under the new credit control regime, a business bank’s right to borrow from the National Bank is, as previously, subject to the observance by the business bank of all relevant regulations and of reserve requirements. Its borrowing rights, however, are now subject to an over-all ceiling as well as to a separate, specific ceiling on its rediscounting facility. The over-all ceiling for a given bank is fixed in proportion to those sight liabilities of the bank that form the basis for calculating the minimum reserve requirement, which is expressed as a percentage of each business bank’s monetary sight liabilities and certain blocked deposits.¹⁶ The over-all ceiling applied during each quarter is the average figure obtained from balance sheets for the preceding six months. In addition to this over-all ceiling, there is a specific limit on rediscounting bills with the central bank; this limit is also quoted as a percentage of the specified sight liabilities used for calculating the reserve requirement.

The rediscount limit is the operative control instrument within the over-all limit on the central bank credit that is available to a business bank. The rediscount limit, initially fixed at 20 per cent of the amount of the over-all ceiling described above, was lowered to 15 per cent in March 1967, raised to 20 per cent in April 1968, and again reduced to 15 per cent in December 1968. The rediscount limit specified for a bank may be exceeded by the amount of credit granted against rediscountable export documents, for both goods and services, provided that, prior to the transactions in question, rediscountings of export bills already amounted to at least 50 per cent of the rediscount limit of the bank. The discount ceiling may also be exceeded for rediscounts relating to export production and under certain conditions for seasonal financing of wheat stocks, for cooperative agreements on production (see p. 594), and for specified housing projects.

At the time of transition from the old to the new credit system at the end of 1966, special credits by the National Bank were granted to banks whose borrowings from the National Bank exceeded the rediscount limit at that moment. Covering the difference between the rediscount limit and total borrowings from the National Bank, this facility was arranged in order to avoid disruptive effects at the time of the introduction of changes in the credit system. No additional special credits would be granted, and the amount of these credits could only decrease. The National Bank could require all banks to repay an equal percentage of their outstanding special credit liabilities. These credits would be regarded as a transitional instrument. For most banks, special credits initially represented the greater part of their borrowing possibilities from the central bank under the over-all ceilings fixed for each business bank by the National Bank.

After requiring a 12 per cent repayment on all special credits beginning in January 1967 (Din 1,060 million), the National Bank ruled in February of that year that the commercial banks had to repay an additional Din 970 million, representing 12 per cent of the remainder of the special credits outstanding, in installments in March, May, and June 1967. The measure was aimed at reducing demand pressures in the economy and at discouraging speculative stockpiling of finished goods. During 1968 Din 1,800 million of special credits was withdrawn, while ordinary rediscount ceilings were raised. In the third quarter of 1968 rediscounts exceeded special credits for the first time, and subsequently the role of the special credits has continued to diminish rapidly.

Rediscountable bills. The following types of credit are eligible for rediscounting: (1) for exports of goods and services if the credit period is no longer than 45 days, or 90 days if payments are made in convertible currencies; (2) for export production and services if payments are made in convertible currencies; (3) for commodity exports on commercial credit if the repayment period does not exceed two years and is made in convertible currencies; (4) for certain investments specified in the law for a maximum period of one year, under certain conditions; (5) for long-term cooperation with foreign countries on production under certain conditions; (6) for domestic sales of goods and services up to a maturity of three months in general, six months for coal, and nine months for agriculture; (7) for seasonal wheat stocks up to ten months; and (8) for housing, under certain conditions.

No bills can be rediscounted for an amount smaller than Din 10,000 or maturing in less than 30 days from presentation for rediscounting. Within the rediscount limit, but without presenting any bills for rediscounting, a commercial bank can borrow from the central bank for a term of ten days; such short-term advances are intended to overcome temporary liquidity shortages of the banks and cannot exceed 2 per cent of the bank’s compulsory deposits with the central bank.

Other conditions applying to rediscounts. In order to remain entitled to rediscounting with the National Bank, each commercial bank must adjust its short-term lending so that at least 50 per cent of its total amount is for credits with a repayment term of three months or less. A ratio of 30 per cent is permitted if the entire difference is accounted for by credits for agriculture and exports.

Treasury-central bank relations. In the period of centralized economic control, central bank policy was subordinated to the task of plan realization, and net central bank credit to the government sector was, in principle, determined so as to ensure absorption, at the planned prices, of the planned supply of goods and services by the sector in question. The budgetary and extrabudgetary funds of the entire government sector were, from the viewpoint of resource planning, treated as a consolidated account. In addition to planned net additions of central bank credit to that account, each government unit had access to central bank credit for the purpose of balancing seasonal cash fluctuations. The implementation of the described relations between the budgetary sector and the central bank was not without considerable complications. In the early postwar years, the wide-ranging institutional changes and the state of the economy made it difficult to operate the fiscal mechanism effectively. There were major revenue shortfalls and large-scale inflationary financing of ambitious investment programs.

As soon as a degree of economic decentralization was introduced and the theoretical aim of total planning control was abandoned, the problem of central bank financing of the government sector assumed, more or less, its conventional characteristics. When the various government units acquired some financial independence, the need for nonin-flationary financing of their budgets was at once recognized as necessary for orderly economic growth. The need for adequate budgetary reserves at each level of government came to be strongly emphasized, although flexibility was provided by permitting central bank financing of seasonal shortfalls in revenue.

In practice, the government sector frequently had to rely on central bank credit to a larger extent than the monetary authorities held desirable. In particular, it proved difficult to accumulate meaningful amounts of budgetary reserves, and there were also persistent problems connected with central bank financing of deficits incurred by important extrabudgetary bodies. Central bank financing of cash deficits described as “seasonal” was extensive, and the government units in question, including the Federal Government, tended to accumulate deficits financed by the central bank so that these advances were in effect becoming long-term loans. It proved difficult to contain the cumulatively growing central bank financing of the administrations within a coordinated contracyclical pattern.

The consolidation and control of these advances repeatedly created difficulties and adversely affected implementation of stabilization policies, and a rigid attitude against any central bank credit to the government sector gained support. It was recognized that complete denial of recourse to central bank credit would limit the use of fiscal policy as an instrument to influence the economy; on the other hand, there was clearly a need for strengthened budgetary discipline, and, under the Yugoslav circumstances, it was difficult to impose sufficient restraint on the government sector’s borrowing from the central bank by increasing the independence of the bank. In 1966 the parliament adopted legislation forbidding all short-term borrowing by the government sector from the banks; this also implied that central bank financing of budgetary and extrabudgetary deficits, even on a seasonal basis, was to be discontinued and that seasonal fluctuations in the administrations’ cash flows would be balanced by means of their reserve liquidity. The new rule was implemented gradually, and in 1967 the Federal Government still qualified for central bank credit to balance seasonal fluctuations in flows of revenue. From the beginning of 1968 governments at all levels have been effectively denied short-term bank credits, and they are under an obligation to add 1 per cent of total current revenues annually to a reserve fund that may be used to smooth out seasonal discrepancies between revenues and expenditures; amounts withdrawn from such funds must be repaid by the end of the fiscal year.

Regulation of economic organizations’ liquidity

At the beginning of 1970 some monetary regulations came into force in connection with a broader package of measures concerning the liquidity of economic organizations. A large number of these organizations were unable to pay suppliers in time, and the growing amount of mutual indebtedness threatened to disrupt the flows of output and income. The official position was that the “illiquidity” problem could be solved only by stricter implementation by economic organizations of the principles of the economic reform and not by merely expanding the money supply.

In order to eliminate some of the causes of “illiquidity,” the National Bank was authorized to set maximum amounts to which business banks could “guarantee” investments, i.e., guarantee long-term financing of a project at a later stage. Such “guarantees” were also limited to residential and infrastructural projects. The position of the creditors was strengthened by obliging the Social Accounting Service to furnish information on the financial position of an economic organization to interested parties.

The measures contain the following provisions concerning “illiquid” organizations: (1) no new bank credit may be granted if the organization has unpaid liabilities that have been due for more than 60 days; (2) only 80 per cent of average personal income payments of the previous year may be made if the organization has no monetary assets (giro account balance); (3) the priority of liabilities must be rearranged according to the maturity dates (normally, economic organizations are required to meet tax obligations first; “illiquid” organizations must give only turnover tax payments first priority); (4) time deposits cannot be made as long as outstanding liabilities are due.

The following provisions apply to organizations that are operating at a loss: (1) the organization must initiate a recovery program, and it can be put under compulsory management; (2) the recovery program will be supported by the joint reserve funds of economic organizations and by exemption from taxes on personal incomes, provided that they are not above the monthly federal minimum of Din 300 (net) per worker; (3) if the recovery program fails after a certain date, bankruptcy proceedings must be instituted.