Postwar Developments in Money and Banking in Yugoslavia
Author: J. J. Hauvonen

IN THE IMMEDIATE POSTWAR PERIOD, the Yugoslav political and administrative institutions were developed with the aim of fully centralized economic planning and control. The initial choice of centralized economic control was based on considerations that included but were not limited to ideological concepts. At the time, the economy faced great problems of reconstruction and structural change, and the available resources were scarce. Under similar circumstances, countries with widely differing political and economic systems have applied administrative controls and physical rationing of supplies. The period of centralized controls was short in Yugoslavia, and by the early 1950’s the fundamentals of a decentralized socialist economy specifically adapted to Yugoslav circumstances had been created.


IN THE IMMEDIATE POSTWAR PERIOD, the Yugoslav political and administrative institutions were developed with the aim of fully centralized economic planning and control. The initial choice of centralized economic control was based on considerations that included but were not limited to ideological concepts. At the time, the economy faced great problems of reconstruction and structural change, and the available resources were scarce. Under similar circumstances, countries with widely differing political and economic systems have applied administrative controls and physical rationing of supplies. The period of centralized controls was short in Yugoslavia, and by the early 1950’s the fundamentals of a decentralized socialist economy specifically adapted to Yugoslav circumstances had been created.

IN THE IMMEDIATE POSTWAR PERIOD, the Yugoslav political and administrative institutions were developed with the aim of fully centralized economic planning and control. The initial choice of centralized economic control was based on considerations that included but were not limited to ideological concepts. At the time, the economy faced great problems of reconstruction and structural change, and the available resources were scarce. Under similar circumstances, countries with widely differing political and economic systems have applied administrative controls and physical rationing of supplies. The period of centralized controls was short in Yugoslavia, and by the early 1950’s the fundamentals of a decentralized socialist economy specifically adapted to Yugoslav circumstances had been created.

In the period of centralized planning and control in the Yugoslav economy, complex problems were encountered and the experience generally was not encouraging. Subsequent development of the economic system, through various stages, has provided insight into the problems of economic policy in a system of decentralized socialism. The discussion below concentrates on the monetary aspects of the emerging Yugoslav economic system, but some connected aspects of general economic policy are described briefly for background.

I. The Development of the Monetary System, 1945–65

The period of centralized economic control

During World War II the Yugoslav monetary system had been adapted more to the requirements of the occupying powers than to those of the Yugoslav economy. There were separate central banks in Croatia and Serbia, and the dinar remained the official currency only in Serbia; in Croatia the kuna had become the official currency. Currencies of the occupying powers were in circulation in other parts of the country. The Yugoslav partisans did not issue their own currency during the War but used the existing currencies in the areas in which they operated, obtaining necessary resources by means of requisition and taxation. The commercial banks1 were controlled by the occupying powers during the War.

During a transitional period, begun in 1945, a unified currency system based on the dinar was restored, and the entire banking sector (as well as industry and trade) was nationalized.2 Socialization of agriculture could be carried out effectively only in selected areas, and in 1950 cooperative and state farms accounted for no more than one fourth of all arable land. The monetary institutions, as well as other instruments for the implementation of centrally planned and controlled development, were quickly established and were functioning when the implementation of the first five-year plan (1947-51) began. Fully planned and controlled prices were applied, initially in conjunction with physical rationing of most consumer supplies. Owing to critical shortages of many essential items, pressure on regulated prices was intense. The authorities used the technique of allowing the prices of nonessential items or quantities of essential items beyond minimum rations to be formed freely to absorb some of the demand pressure.

In the event, the period of fully centralized economic management in Yugoslavia was short. The breakdown of U.S.S.R.-Yugoslav relations occurred in 1948, resulting in almost immediate disruption of Yugoslavia’s foreign trade relations. The substantial agreements on long-term credits for deliveries of machinery and equipment by the U.S.S.R., Czechoslovakia, and Hungary were, in effect, nullified. At the same time, Yugoslavia found it necessary to allocate substantial additional resources to national defense. Thus, important basic assumptions of the five-year plan had to be abandoned.

Considering the severity of the initial dislocations caused by the break with the Soviet bloc, it can be argued that the first five-year plan, based on centralized planning and management, never had a fair test of its workability under Yugoslav conditions. The “objective” failure of the first five-year plan in Yugoslavia, therefore, must not be sought primarily among output indices and payments data but in the presumption in the plan of centralized planning and control of the country’s economy, with market forces and consumer choice so restricted that they were assumed to be unable to disturb the planned commodity and financial flows. An attempt to effectively implement centralized planning and control of an economy presupposes a purposeful and tested mechanism for communicating and processing a large volume of complex accounting data. It also presupposes effective execution of detailed decisions on shifts in resource allocation, pricing, and other instruments of plan implementation. The implementation of such a system was made particularly difficult in Yugoslavia in the late 1940’s by deficiencies in statistical and administrative services and in communications, as well as by the process of postwar reorganization and adaptation, which made the processing and analyzing of data exceptionally complicated.

The emergence of decentralized economic management

Yugoslav socialism emphasizes the view that progress toward communism implies direct cooperation in all human activities and that, in this process, the controls and restrictions imposed by the government can be gradually eliminated. This view led the Yugoslavs to accept decentralization of decision making and control, which, in turn, induced the introduction of autonomous economic units. As fully centralized control was rejected, it became appropriate to make use, under certain limitations and conditions, of the market mechanism for guidance of the interaction between the economic units. These shifts from detailed centralized planning implied that the monetary mechanism gained sharply in importance, becoming a key instrument of the authorities.

The architects of Yugoslavia’s new economic system recognized that the logic of the move from a centrally governed, planned economy to a decentralized, market-oriented economy would, in the longer run, require extension of the new thinking and its institutions and instruments to the entire economic and social system. On the other hand, many experiments and transitional arrangements were necessary to carry out the pioneering reforms, and under the guidelines of the economic reform initiated in 1965, the economic system is still in the process of dynamic development and adaptation.

The initial steps toward decentralization, put into effect in 1952, were partial and contained several “safety devices.” Decentralized decision making in industry and business was achieved by giving operative independence and responsibility to each economic unit—the units are called economic organizations. Each worker participates directly in the economic organization’s self-management, exercised at the highest level within an elected workers’ council. Business operations are directed by managers, elected by and responsible to the workers’ council. Initially, considerable planning and financial control was maintained in the hands of the authorities. An important characteristic of the economic organization’s relation with the society as a whole is that the means of production remain social property but are placed at the disposal of the workers in a kind of trustee arrangement. Reflecting this relationship, each economic organization annually pays to the Government a capital tax levied on the assessed value of its fixed assets. The assets of the economic organization are constantly augmented by their own investments, and the initial capital assigned to them by the government sector now represents a small part of their total assets.

Aside from the ownership of means of production, a Yugoslav economic organization functions like a workers’ cooperative, aiming at the maximizing of profit, meaning here the longer-run maximizing of workers’ earnings. The workers’ council is responsible for the economic organization’s income distribution, but its freedom of action in this respect is circumscribed by official regulations regarding commercial payments, taxes and social contributions, credit operations, amortization and reserve funds, etc. Thus, the independent decision making by the workers’ council in the distribution of income actually relates to the achieved net income. The net income beyond minimum personal income can be distributed as additional personal income and/or invested in the undertaking.

The initial decentralization measures, in addition to establishing the workers’ management system discussed above, contained the following main reforms.

(1) The introduction, in principle, of market-based price formation; this was to be implemented gradually, and the Government retained authority to regulate prices when socially necessary.

(2) An increase in the role of local governments, resulting in a declining scope for federal fiscal instruments.3

(3) Budgetary investment grants were, in the main, abolished, but administrative investment control was maintained under a system of investment funds established at each level of government. The investment funds granted interest-bearing, long-term credits. The funds obtained their resources from the capital tax and other specific contributions (earmarked taxes) paid by all economic organizations. The most important of these funds was the General Investment Fund, operating at the federal level and financing projects of all-Yugoslav significance.

(4) The declared intention of the authorities was to extend the operation of market forces to banking and credit and to develop money and capital markets appropriate to the Yugoslav conditions. Initially, however, there was little change; the National Bank continued to control all credit under annual credit plans, and together with the Social Accounting Service it maintained detailed control of the financial resources and transactions of the economic organizations. In fact, the desired move to indirect monetary control and to movements of money and capital based on the operation of market forces presented considerable problems, and reforms are still continuing.

(5) The state monopoly of foreign trade was abolished, and economic organizations fulfilling certain legal conditions were authorized to engage in foreign trade. The linking of the Yugoslav economy with world markets by means of a realistic exchange rate and import liberalization was a policy objective from the beginning of the decentralization era and an important part of the new economic concepts. Various difficulties have been encountered, and progress toward import liberalization has been slower than had been hoped.

Banking institutions during the period of decentralization

The development of banking institutions during the period of centralized economic management ended in the “monobank” era, i.e., the National Bank by the early 1950’s had become, for all practical purposes, the sole financial intermediary in the economy. However, rediversification of the institutional structure in banking had already begun in 1955. In the beginning of the 1960’s, direct credit relations between the National Bank and economic organizations were gradually abolished. Prior to the 1965 banking reform, the following financial institutions and bodies were operative.

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.

Monetary policy during the period of initial decentralization

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.

Investment finance in the period of initial decentralization

Before World War II the mainstay of the Yugoslav economy was labor-intensive agriculture, and progress in industrialization was slow. In some areas mineral exploitation and metallurgy, often operated by foreign interests, had reached some significance, but large regions were devoid of any industrial activity. Manufacturing industries were small scale, oriented to the domestic market, and of slight over-all economic significance. Road and rail networks were inadequate, and electric power had not yet reached most parts of the country. The few industrial installations and the transportation system had suffered severe damage during the War.

Therefore, at the beginning of the reconstruction period, high investment in industry was seen as a key requirement for accelerated growth. Moreover, the country’s infrastructure could not support more economic activity, and it also required large investments. Thus the tasks of investment finance were to channel a high proportion of available domestic resources to investment and to seek additional financing abroad. The establishment of investment priorities and the controlling of investment expenditures became major policy issues.

The level of domestic saving and investment achieved in Yugoslavia, particularly in the 1950’s, was high. New investment in fixed assets regularly amounted to some 30 per cent of social product, and by far the largest part was covered by domestic saving.

During the period of centralized economic management (up to 1952), practically all investment was financed from budgetary grants. Subsequently the establishment of social investment funds, financed mainly through specific contributions paid by the economic organizations, represented a degree of decentralization. Nevertheless, investment credit remained a key instrument of central planning and control in Yugoslavia.

Thus, during the period of decentralization, the main part of public financing of investment was effected through social investment funds at the federal government, republic, district, and commune level, by the investment funds of state institutions, and by a variety of specialized loan funds, notably the communal housing funds. Public institutions had specific funds from which they financed their own investment needs. The borrowers from the social investment funds were mainly the economic organizations. In exceptional cases—largely confined to railways, roads, ports, and airports—the social investment funds acted as intermediaries on behalf of the governments in providing investment financing in the form of grants.

In the early 1950’s an attempt was made to allocate investment credit by means of “loan auctions.” The prospective investors submitted to the social investment funds their offers on interest rates and repayment terms in competition with each other. The system, however, was quickly abandoned. Under the circumstances prevailing, it was found that adherence to over-all investment priorities was of vital importance, while all profitability calculations between alternative projects were seriously distorted by deficiencies in the price system, import restrictions, etc. More generally, the lack of price stability made the nominal interest cost an unsatisfactory instrument for regulating investment demand; speculating on further price increases, borrowers offered very high nominal interest rates.

With the diversification of the banking system, the social investment funds came to be administered by banks, the federal and republican funds by the Investment and Agricultural Banks, and those of districts and communes by the communal banks. This resulted in less administrative intervention in investment finance. Another factor promoting decentralization was the increasing importance of self-financing by economic organizations through compulsory amortization funds and voluntary investment funds.

By far the most important source of investment credit in the period of initial decentralization was the General Investment Fund, which derived its resources from the proceeds of a capital tax, a share in the profits tax,10 foreign borrowing, etc., as well as from repayments on earlier loans. In addition to following certain priorities established under the plans, the General Investment Fund sought to apply a general screening of credit applications by requiring that the borrowing economic organizations self-finance a specified minimum share of their proposed investment projects. An additional instrument in the hands of the General Investment Fund was the authority to regulate the allocation of foreign exchange for imports of investment goods.

In inviting credit applications and in deciding how much was to be allocated to different branches of the economy, the investment funds were guided by the investment program outlined in the annual social plan. Here a variety of criteria were applied. Some account was taken of profitability, but this was a rather vague concept under the then existing economic conditions, and considerable use was made of an alternative criterion—the marginal capital/output ratio. However, the existence of price distortions in the Yugoslav economy and the urgent need for investment in infrastructure made it impossible to rely entirely on market criteria in the planning of investment. Some preference was given to investment in projects that were likely to improve the balance of payments. Selective investment control was implemented also by different regulations for the various industries with regard to the minimum share that the economic organizations were required to self-finance in their proposed projects. The minimum participation was negligible in power and fuel, in construction it varied between 10 per cent and 30 per cent, in agriculture between 10 per cent and 40 per cent, in transport between 20 per cent and 50 per cent, and in industry between 20 per cent and 80 per cent.

Before providing investment finance to any individual project, the investment funds ascertained that the project would yield income sufficient to cover amortization, interest on the loan, and the capital tax on the part of the project that was not financed by borrowing. Interest rates were usually 2-4 per cent per annum; for investment in production facilities, they were so low in relation to capital yields (in current prices) that they had little or no effect on the distribution of investment. An important consideration for the investment funds in deciding between loan applicants was whether the commune in question supported the particular project and was prepared to guarantee the repayment of the loan.

Of all the social investment funds and other special funds, only the General Investment Fund was allowed to borrow from the banking system and then only to meet seasonal liquidity needs.

II. The Institutional Reform in Yugoslav Banking, 1965-66

Banking institutions after the reform in 1965

After the banking reform in 1965,11 the banking institutions were reorganized during a period of adaptation, which formally ended on March 31, 1966. However, in many important respects the adaptation process in banking will continue for a fairly long period. From April 1, 1966 the banking institutions are the following.

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 banks’ organization

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 banks’ resources

The banks’ resources for their banking operations have the following origins:

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.

Credit operations

The commercial banks’ operations are divided into two main sections: short-term credit and corresponding liabilities; and long-term (investment) credit and appropriate liabilities (credit fund, time deposits, etc.). Credits with an originally agreed repayment term of ten months or less are defined as short term.12 While a bank may use resources that qualify for investment lending for any credit operation, the regulations strictly prohibit granting of long-term credit on the basis of a bank’s short-term liabilities; the aim of the regulation is, in particular, to prevent financing of investment by utilizing short-term central bank credit.

The liabilities that, subject to the possibility of additional temporary restrictions, a bank may use to grant investment credits are the following: the credit fund, the bank’s other own funds (except its reserve funds), time deposits with a term of more than one year, securities issued with a redemption period of more than one year, foreign long-term credits received, and resources placed at the disposal of the bank by the government sector for the purpose of investment in the economy.

Short-term credit, on the other hand, may be granted on the basis of the above-mentioned resources as well as the following: sight deposits, time deposits with a term of up to one year, restricted deposits, short-term securities issued by the banks, short-term foreign credits received, and a bank’s borrowing from the National Bank.

Up to a stated percentage of the savings deposits of households may be used as the basis for granting consumer credit; a certain percentage must be used to finance housing. These items thus form an “earmarked” category within the short-term balance sheets of the banks.

A bank’s credit committee must endeavor to direct available credit resources to creditworthy borrowers in accordance with both general criteria and the bank’s own criteria for credit priority. Notably, the credit must be used efficiently and profitably, enabling the borrower to service the loan and to repay it on time. The bank must, in all credit operations, observe the regulations issued by the National Bank; these cover such matters as transactions that may be financed by short-term credit, transactions that specifically qualify for central bank financing, credit-worthiness criteria, credit terms, and interest rates. In granting long-term credit, the bank must ensure that its liquidity position will continue to meet both official and the bank’s own requirements. Each bank must also keep its borrowing from the National Bank within limits established by the National Bank. The limit is determined by application of a certain percentage to deposits and other specified liabilities of the bank in question. The bank is responsible for ensuring that each credit is used only for the purpose for which it was granted.

Banks’ accounts

An important feature of Yugoslav credit and monetary policy is the strict separation of short-term credits from investment credits (see pp. 582-83). From the early 1950’s to 1965 the separation of short-term bank credit from investment finance presented no accounting problems as far as the banks were concerned, as investments were financed mainly through the social investment funds, which accounted for most of the accumulation of investible resources in the economy.13 As explained earlier, although technically operated by banks, the investment funds were separate financial entities with their own accounts. The federal specialized banks acted as intermediaries for foreign loans and for specific kinds of credit financed through the federal budgets. The commercial banks were, in principle, involved only in short-term credit business.

After the abolition of the social investment funds, the banks became the economy’s intermediaries of accumulation and main sources of all categories of credit. At the same time, a new system of bank accounting was introduced in order to maintain effective separation of investment and short-term credit. In line with the dual role of banks, the new accounts are divided into two separate balance sheets, one for the short-term accounts section and one for the investment banking section. Within the short-term balance sheets, bank deposits were reclassified, and monetary sight deposits14 were separated from other sight deposits. At the same time, the money supply data were adjusted to exclude the nonmonetary sight deposits.

The investment section is required to maintain a cash reserve that is kept on a current account with the short-term accounts section. As it is always permissible to grant all types of credit within the long-term section’s resources (subject, at present, to a required channeling of at least 25 per cent of the investment resources to credit for working capital), and as transfers of short-term liabilities to the long-term section are not allowed, the balance on the current account mentioned serves as an indicator of the banks’ observance of the prescribed dichotomy in bank credit.

Income distribution in banks

The banks’ gross income consists of interest on credits granted, commissions and charges on banking services, and miscellaneous income. The net income is obtained by deducting from the gross income the interest payable on the use of social resources (capital tax on own funds), interest payable on credits received, interest payable on deposits and on bonds and other securities issued, and possible write-off of uncollectible credits.

The net income is distributed as follows:

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.

III. Monetary Policy and Its Instruments After the Reforms of 1965-66

Until the banking reforms of 1965-66, the short-term credit regime was based on a system of qualitative measures. An important aim was to ensure that short-term credit was not used to finance consumption or investment in fixed assets. The volume of short-term commercial credit was controlled by establishing detailed definitions and criteria for processing and approval or rejection of credit requests (see pp. 571-72). Although the means of credit control were qualitative, they provided the basic instruments for the control of the volume of credit. The Yugoslav financial authorities were not, however, fully satisfied with the credit control arrangements that existed prior to the 1965 banking reform. Despite gradual refinement of the qualitative credit controls through modifications of criteria, definitions, and control arrangements, the unconditional credit financing of qualifying commercial transactions was abandoned in 1965, owing to mounting problems in its implementation. As a temporary solution for the transitional period, specific limitations were introduced; the most important of these was that, for ordinary commercial bills, bank credit could be granted only to the extent of 50 per cent of the amount of the bill. (There were, however, numerous exceptions.) Also transitionally, the instrument of blocking and unblocking certain funds of the economic organizations was retained, although, in practice, it has been used since the reform only to release previously blocked amounts.

As soon as the institutional reform in banking had been carried out, appropriate adjustments could be made in the credit and monetary policy instruments. There was an obvious contradiction between the new role of the banking system and its adherence to decentralized decision making in granting credits, on the one hand, and the detailed prescription of credit criteria, purposes, conditions, etc., on the other. In addition, the newly acquired right of the commercial banks to compete for clients in the entire country made the operation of qualitative credit regulations even more complicated, and sometimes a bank might interpret the credit criteria so as to attract new business while using National Bank resources to a disproportionate degree. Thus, it became necessary to shift to quantitative regulation of short-term credit by limiting the amount of central bank credit available to each commercial bank, and by abolishing, at the same time, most of the qualitative credit regulations and making room for free decision making by the banks in the implementation of their business policies. There was no basic change in the use of compulsory reserve requirements (see p. 579), although this instrument became more important as the banking system acquired the potential to create deposits through credit expansion not directly controlled by the central monetary authorities. Preferential treatment in rediscounting continued to apply to selected categories of short-term credit, e.g., agricultural and export production, and credit for housing and tourism were granted at concessional (subsidized) interest rates. The new control regime was partially introduced in 1966 and was being fully implemented from the beginning of 1967.

The institutional and policy changes in the banking sector were, of course, only one aspect of the economic reform initiated in 1965. A key element of that reform was further liberalization and decentralization of external economic relations and an opening up of the Yugoslav economy to participation in world markets. That aspect of the reform was particularly reflected in the adjustment of the par value and in the introduction of major changes in the foreign trade and payments arrangements. The new regimes and the new banking legislation together provided for a degree of liberalization and decentralization of external payments and credit relations. All banks that fulfilled certain requirements regarding foreign exchange funds and technical competence might obtain authorization to engage in full-scale banking relations with foreign banks and firms; the number of such authorized banks was 17 at the end of 1969, while 28 business banks had obtained restricted authority to engage in foreign exchange transactions. In addition, all commercial and savings banks might operate authorized exchange offices dealing only in foreign banknotes and travelers checks.

Policy on short-term credit

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.

Investment finance

A key element of the economic reform initiated in 1965 was the further step toward decentralized accumulation of investment resources in the economy. The workers’ management organs became responsible for most decisions on productive investment, and the bulk of capital formation for investment in production facilities now takes place within the economic organizations. The main exceptions to this regime are selected key projects, mostly in infrastructure, financed from resources controlled by the government sector (see p. 582) and investments financed through the budgets. The operations of the Federal Fund for Accelerated Development of the Less Developed Republics and Regions are an important complementing element of the new basic system. Housing funds previously controlled by the local governments have been taken over by banks, but these funds and repayments to them remain earmarked and can be used only for housing credits at low interest rates.

An additional special facility for housing finance is a reduced rediscounting rate of 2 per cent for specified housing loans; the scheme is operated by the National Bank, using federal funds. Subsidized interest rates apply also to credits for the financing of tourist facilities and for housing credits granted out of specified bank resources.

The transfer of investment decision making to the economic organizations is not intended to imply that narrow self-financing considerations are to guide new investment in production facilities. On the contrary, the recent institutional reforms in banking were intended to encourage the pooling of investible resources on a wide basis and their-application to the most profitable projects with a minimum of administrative intervention. Indeed, by 1968 the banks, mainly on the basis of time deposits of economic organizations, financed 50 per cent of all investment in fixed assets, and this ratio has subsequently risen further. At the same time, direct interfirm cooperation is growing,17 and new channels for financial and technical cooperation with foreign enterprises have been opened. Subsequent liberalization of controls of profit transfers and other regulations on joint ventures have resulted in an expansion of cooperation between Yugoslav and foreign firms.

Considering the over-all scarcity of capital in Yugoslavia, measured against the needs and the opportunities, the Government decided to retain a role for administrative control of some investment resources to safeguard financing of projects that have a high priority from the viewpoint of over-all economic development but may not be able to compete profitably with other, less indispensable investment alternatives. The authorities believe, however, that as the new investment banking sector is developed and experience is gained, they will be able to provide the benefits of a workable capital market and become the normal source of borrowed capital. It is considered that as cost-price stability is strengthened and foreign trade is further liberalized, distortions in the demand for capital will disappear and the conditions under which investment banking operates will become normalized and stable. Under such circumstances, the Yugoslav tax system is expected to promote pooling of capital and its channeling to the most efficient users, and to discourage indiscriminate self-financing and “localist” tendencies; this expectation is based on the fact that the economic organizations’ owned fixed assets form the base for the capital tax, whereas the income of the economic organizations is not taxed. Therefore, when speculative considerations do not apply, an economic organization will invest its resources for new investment in its own plant only if the expected yield is higher (by a margin at least equaling the capital levy) than the yield available in the capital market, e.g., interest yield from time deposits or expected yield from profit-sharing plans offered by other firms requiring outside capital.

Interest rates

At the time of the 1965 economic reform, an increase in interest rates was considered to be required in order to channel credit to the most efficient users and to encourage the economic organizations to increase their own working capital and to use it more economically. Moreover, it was desirable to provide a margin for the banks to apply more widely differentiated interest rates on lending as well as on deposits. Upon a proposal from the National Bank, the maximum legal rate on credits was raised from 8 per cent to 10 per cent per annum, with effect from December 1966. As price stability was strengthened, and in order to overcome slackening of economic expansion, the authorities in mid-1968 introduced expansionary monetary measures and, at that time, the maximum lending rate was again reduced to 8 per cent. The rate of interest charged by the central bank on rediscount credit has remained at 6 per cent, but the rate of interest applied to other borrowing by commercial banks from the central bank (special credit) was increased from 6 per cent to 7 per cent per annum from December 1966.

Role of economic planning

The annual economic policy guidelines prepared by the Federal Institute for Economic Planning and approved by the competent government organs also contain a general outline for the credit policy. The credit policy guidelines do not contain any quantitative targets or limits, and the detailed planning of credit policy is left to the competent financial authorities.

Interbank cooperation and further development of the financial system

After the introduction at the beginning of 1967 of the more restrictive regulations on recourse by commercial banks to National Bank credit, an interbank credit agreement was concluded in Belgrade under the auspices of the Association of Yugoslav Banks. A group of business banks joined the agreement under which the Association of Yugoslav Banks has acted on a daily basis as an intermediary between participating banks having surplus liquidity and those that were temporarily short of it. Under the agreement, the member banks assumed a contractual obligation to cooperate with the Association, to limit their borrowing from the pool to bona fide short-term requirements, and to make repayments on time. Banks that did not observe these conditions were excluded from the agreement. Typically, credits under the arrangement were for 15 days and carried interest rates of 7-8 per cent per annum. By offering the banks a new short-term investment opportunity and a means of covering occasional peak liquidity requirements, the agreement was expected to promote more efficient and profitable operations of its member banks. The volume of credits under the agreement has been modest. The business banks continue to search for new forms of cooperation, and the National Bank has expressed its interest in such cooperation because of its significance for efficient utilization of the economy’s resources across regional and sectoral boundaries.

Discussions concerning the further development of the financial structure are continuing, and various financial authorities and organizations have advanced their views and proposals, but these have not yet been formally discussed by the competent federal organs. Major problems are still seen in the limited mobility of financial resources, in the limited range of marketable securities, and in the interest rate structure, which still does not reflect actual conditions in the market for long-term funds.

Flow-of-funds projections as monetary policy framework

From the beginning of 1967 the National Bank of Yugoslavia has used flow-of-funds accounts and projections systematically as a quantitative framework for formation of policy; these studies have replaced an earlier forecast system based on projections of banks’ balance sheets. The comprehensive structure of the flow-of-funds accounts is relied upon to provide policymakers with quantitative indications as to policy goals and measures for their implementation and to ensure a consistent incorporation of monetary planning in general economic planning.

The flow-of-funds studies and the related projections are prepared on annual and monthly bases. Annual projections involve two stages. The first is projection of flow-of-funds accounts on the basis of appropriate relationships, historical trends, institutional changes, economic policy targets, etc. The final result of this stage of planning is a projection of the Monetary Sector transactions as residuals, including changes in money supply and in short-term credits as key projections. The second is decomposition of the Monetary Sector account into the Central Bank Sector and the Other Banks Sector, which makes possible a projection of measures for the implementation of projected changes in short-term credits and money supply.

Monthly planning has two objects: first, to check annual projections and, if necessary, to adjust them to actual developments; and second, to introduce seasonal components. Seasonal adjustment is made only for the Monetary Sector, its two subsectors, and credit policy measures. Monthly projections are made every month for three months in advance.18

Comments on the present policy instruments

It is still early to assess the effectiveness of the monetary controls that are based substantially on quantitative regulation of central bank credit. Several transitional arrangements remain in operation. The most important of these is the special credit tranche within the over-all central bank credit quotas established for each business bank. The National Bank has been rapidly reducing the volume of special credits. In line with the estimated proper rate of over-all expansion of money supply, some of these withdrawals of central bank money have been compensated for by the normal expansion of ordinary rediscounts. In part, the National Bank has used the reductions in special credits to offset the impact of injections of earmarked central bank credits that have been necessary to finance the purchasing of crops. The National Bank has not indicated what its further intentions are with respect to special credits. However, it appears that once a certain target is reached, the remaining special credits will be integrated gradually with the rediscount quotas, leading to rediscount ceilings of a normal type as the replacement of the present divided quotas.

Basically, the monetary policy instruments now available comprise the rediscount ceilings, the interest rate and other terms on rediscounts, the variable reserve requirement, and occasional direct central bank financing. The money market arrangements need further refinement. The system is still deficient in respect of securities with a range of different degrees of liquidity. Further institutional modifications and activation of an autonomous financial community will have to precede any useful experiments with open market operations. While institutional and legal arrangements for a workable capital market linked with foreign sources of investment resources have been developed, the mobility of capital is still small, and it is not yet clear in which form a true securities market can and will evolve.

The federal financial authorities, implementing their policies through the Social Accounting Service, still have at their disposal an important control instrument in their authority to regulate the keeping of accounts by the economic organizations. Significant changes in money supply and short-term credit can be and, in practice, have been achieved by changing the liquidity of certain financial assets of the economic organizations. Such supplementary instruments as investment financing controls, consumer credit regulation, export credit controls, and the possibility of public bond issues with voluntary or compulsory subscription, are also available to the federal financial authorities.

The criteria according to which the policy instruments are manipulated have shown marked development in recent years. The money supply concepts have been refined, and flows-of-funds and velocities of components of the money supply are constantly measured and projected as the means for estimating effects of alternative credit policy actions.

Summing up, it appears that the Yugoslav monetary mechanism, and within it the instruments of control available to the authorities, have been consistently and purposefully developed in line with the sociopolitical change that first created independent economic organizations and, subsequently, independent financial intermediaries. The arrangements now in operation have forms and functions that can be discussed in terms that would apply in a market economy at the intermediate stage of financial development. The capital market is as yet undeveloped and is likely to emerge in a hybrid form to take account of the fundamental features of the Yugoslav economic system.

Evolution de la monnaie et du système bancaire en Yougoslavie depuis la guerre


Depuis 1945, l’évolution du système bancaire de la Yougoslavie a été étroitement liée à son évolution sociopolitique. Immédiatement après la guerre, les banques furent nationalisées et, dans cette période de planification et de dirigisme centralisés, la banque centrale devint le seul intermédiaire financier.

Après 1950, la Yougoslavie a appliqué, en politique et en économie, des principes de socialisme décentralisé spécialement adaptés aux conditions du pays. Pour le système bancaire, cela a conduit d’abord à une rediversification de sa structure puis, après les réformes de ce système en 1965-66, à des banques commerciales dépendant principalement des organismes économiques et fonctionnant en concurrence.

Pendant la période de dirigisme économique centralisé, le crédit à court terme à la production et à la distribution était un élément du plan financier annuel appliqué directement par la banque centrale. Après les premières mesures de décentralisation, les effets commerciaux ont continué à être financés automatiquement; le volume de ces crédits n’était pas considéré comme critique, ces avances se dénouant automatiquement au fur et à mesure des échéances. Par la suite, un régime de contrôle qualitatif du crédit fut introduit et accompagné de conditions de réserves obligatoires, du blocage temporaire de certains comptes et d’autres réglementations. En modifiant les conditions de réescompte des effets commerciaux, il était possible de régulariser le volume du crédit à court terme, mais l’application de ce régime a entraîné de nouveaux problèmes.

Après les réformes de 1965-66 et parallèlement à l’introduction de méthodes plus modernes de statistique et d’analyse, les moyens de régularisation du crédit à court terme et de l’expansion monétaire ont été améliorés et augmentés. Ils comprennent maintenant des plafonds de réescompte pour chaque banque commerciale, des conditions de réserve minimum, des réglementations de l’escompte et des prêts bancaires et divers autres instruments sélectifs. Il existe certaines réglementations particulières provisoires. Les opérations d’open market ne sont pas encore possibles en l’absence d’une véritable bourse des valeurs. Le financement à court terme des budgets de l’Etat par la banque centrale a été interdit depuis 1968. Les autorités ont décidé de se passer des facilités cycliques et saisonnières accordées auparavant par la banque centrale afin d’imposer une stricte discipline financière à l’administration.

Le régime du financement des investissements a évolué, les subventions budgétaires faisant place à des fonds d’investissement contrôlés par l’Etat puis à des opérations bancaires d’investissement contrôlées principalement par les organismes économiques. Les investissements d’infrastructure et l’aide aux régions sous-développées du pays demeurent du ressort du Gouvernement. Les autorités considèrent que la mobilité du capital demeure insuffisante. Il est probable qu’à l’avenir il se créera un véritable marché des capitaux, bien que sous une forme hybride, qui tiendra compte des traits fondamentaux du système économique yougoslave.

Evolución del sistema monetario y bancario de Yugoslavia en la posguerra


La evolución del sistema bancario de Yugoslavia ha tenido lugar en estrecha coordinación con los acontecimientos sociopolíticos ocurridos en el país desde 1945. Inmediatamente después de la guerra, los bancos fueron nacionalizados y, durante el período de planificación centralizada y de control de la economía, el banco central se transformó en el único intermediario financiero.

Desde principios de la década de 1950, las medidas de orden político y económico adoptadas por Yugoslavia se han basado en los principios de un socialismo descentralizado, adaptado específicamente a las condiciones del país. En el sector bancario, esto entrañó, primero, una rediversificación de la estructura bancaria y, más tarde, tras las reformas bancarias de 1965-66, la creación de bancos comerciales que operan en competencia recíproca y controlados principalmente por los llamados organismos económicos.

Durante el período de administración económica centralizada, el crédito a corto plazo para el financiamiento de la producción y la distribución formaba parte del plan financiero anual cuya ejecución estaba directamente a cargo del banco central. Después de las medidas iniciales de descentralización, las letras comerciales siguieron financiándose de modo automático; se consideraba que el volumen de tal crédito no tenía importancia crítica puesto que se suponía que esos anticipos se liquidaban por sí solos. Más tarde, se implantó un régimen de control cualitativo del crédito que se complementó con normas relativas al encaje legal, congelación temporaria de ciertas cuentas y otras disposiciones. Una modificación de las condiciones que regían para el redescuento de las letras comerciales permitió regular el volumen de crédito a corto plazo; no obstante, la puesta en práctica de ese régimen trajo consigo nuevos problemas.

Después de las reformas de 1965-66, y en coordinación con la preparación de estadísticas y métodos analíticos más avanzados, los instrumentos de política destinados a regular el crédito a corto plazo y la expansión monetaria han sido más efectivos y numerosos, y en la actualidad comprenden límites de redescuento para cada banco comercial, requisitos de encaje legal, regulación de las tasas de redescuento y de los créditos bancarios, y diversos instrumentos selectivos. Existen algunas disposiciones especiales transitorias; todavía no pueden realizarse operaciones de mercado abierto ya que el país carece prácticamente de un mercado de valores. Desde 1968, se ha prohibido que el banco central otorgue créditos a corto plazo para el financiamiento de los presupuestos públicos; las autoridades han decidido no valerse de las facilidades de crédito cíclicas y estacionales que antes les otorgaba el banco central a fin de obligar al sector administrativo a ajustarse a una estricta disciplina financiera.

El régimen de financiamiento de inversiones que operaba a base de donaciones presupuestarias, pasó a efectuarse a través de fondos de inversión controlados administrativamente y, luego, a través de operaciones bancarias de inversión controladas principalmente por los organismos económicos. Las inversiones de infraestructura y la ayuda para las regiones menos desarrolladas del país siguen estando a cargo del gobierno. Las autoridades consideran que la movilidad del capital es todavía inadecuada; cabe suponer que en el futuro llegue a existir un verdadero mercado de capitales, aunque de naturaleza híbrida, habida cuenta de las características fundamentales del sistema económico yugoslavo.


Mr. Hauvonen, Senior Economist in the European Department, is a graduate of the Helsinki School of Economics.


Before World War II there were about 600 commercial banks in Yugoslavia, most of them small. In addition, there were numerous credit cooperatives, organized into central associations by branches. Of the 5 big commercial banks, 3 were controlled by foreign interests.


Banks, industry, transport, and wholesale trade, December 1946; retail trade, April 1948.


The Socialist Federal Republic of Yugoslavia comprises six republics and two autonomous regions. Locally, the administrative unit is the commune (opstina); previously, several communes together formed a district (srez), but districts were abolished in the mid-1960’s.


Recently, legal provisions have been approved for depositing the resources of the Postal Savings Bank with the commercial banks, but this change has not been implemented so far.


National loans with compulsory subscription were issued in 1948 and 1951. In 1963 a loan was issued for reconstruction in Skopje; sold to economic and social organizations, the seven-year, 6 per cent bonds provide limited transferability. In 1964 a bond issue was sold to economic and social organizations to finance infra-structural investments by the Federal Government.


For example, an economic organization, or a bank, cannot own equity in another economic organization. A bank can obtain a mortgage on an economic organization’s fixed assets and inventories as a security for credit; if the credit is not repaid, the bank can recover by liquidating such assets but it cannot “own” them.


Final expenditure under Marxism implies private and public consumption and investment in fixed assets.


See, e.g., Albrecht Forstmann, Geld und Kredit, Erster Teil (Göttingen, 1952), pp. 63-65 (in German). The Bank of England used the real-bills argument to defend policies it implemented in 1797-1821, and the subsequent criticism evolved into the controversy between the banking and currency schools of thought. In discussing money as tickets entitling factors of production to a corresponding share of output, Friedrich Bendixen (d. 1920) subscribed to the “needs of trade” approach of the banking school as the basic guideline in noninflationary commercial finance.


The official view was that meaningful interest policy was possible only after various institutional reforms, and, in any case, relative price stability had to be achieved first.


This tax was levied on profits that were considered to be exceptionally high under specified, rather complex criteria; it was gradually abolished in the early 1960’s.


The legal foundation of the reform is contained in the National Bank of Yugoslavia Law, 1965 and in the Banking and Credit Law, 1965; for an English translation of the laws, see Hans Aufricht, Central Banking Legislation, Vol. II (Washington, 1967), pp. 747-58 and 814-52.


In exceptional cases, short-term credit may be granted for a period of up to two years.


A control problem did exist with regard to shifts of funds (including short-term borrowing) between accounts within an economic organization.


Sight deposits of nonbank, nongovernmental entities, excluding blocked or potentially blockable accounts.


In exceptional cases, however, repayment terms of up to two years may be granted.


The minimum reserve ratio is subject to a legal maximum of 35 per cent; the central bank has, in recent years, made frequent but small changes in the actual ratio within the range of 25–35 per cent.


Under the new credit regulations, direct investment cooperation between economic organizations is provided for, although credits between them remain prohibited, in principle. Overdue commercial payments are not unusual, however, and it is difficult to determine to what extent such balances in fact represent credit arrangements.


See Dimitrije Dimitrijević, “The Use of Flow-of-Funds Accounts in Monetary Planning in Yugoslavia,” International Association for Research in Income and Wealth, The Review of Income and Wealth (New Haven, Connecticut), No. 1, March 1969, p. 101. (Dr. Dimitrijevic is Director of the Research Department of the National Bank of Yugoslavia.)

IMF Staff papers: Volume 17 No. 3
Author: International Monetary Fund. Research Dept.