YUGOSLAVIA'S PROSPECTIVE CURRENCY DEVALUATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T01003A002100210001-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 15
• Document Creation Date: November 16, 2016
• Document Release Date: April 10, 2000
• Sequence Number: 1
• Publication Date: December 1, 1964
• Content Type: BRIEF

Approved For Release ZQ00/Q5~ ?~ ~4t a 1002-1-1 1
CIAJ RR CB 64 75
D_ecerbex 1964
YUGOSLAVIA'S PROSP CTIV;t Cv,j. vc'r~ L1~~t
DIRECTORATE ' OF. INTELLIGE CE
Office of Research and Reports
Rgpe i
gxdvuded._fiom au omatic
i wngradirrg and
hp~~cta~tificatIon
avw'TF'~+!' ..
 Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Secs. 793 and 794, the trans-
mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
 Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
C-O-N-F-I-D-E-N-T-I-A-L
YUGOSLAVIA'S PROSPECTIVE CURRENCY DEVALUATION
Yugoslavia may devalue its currency before the end of the year
in order to ease the pressure on its balance of payments. The devalua-
tion reportedly will increase the official rate of exchange from 750
dinars to US $1 to between 1, 000 and 1, 200 dinars to US $1, but the
resulting increase in export revenues and import costs in dinars will
be offset in part by selective cuts in export subsidies and import tar-
iffs. Improvement in the balance of payments and relaxation of admin-
istrative interference in foreign trade are alternative ways of taking
advantage of the devaluation. The Yugoslav government is likely to
give priority to the balance of payments problem because the trade
deficit has grown to unprecedented levels under the strong inflationary
pressures of recent months. There also is strong interest in a further
liberalization of economic controls to promote a more efficient alloca-
tion of Yugoslav resources and to qualify Yugoslavia for full member-
ship in the General Agreement on Tariffs and Trade (GATT).
1. Details of the Rumored Change
Statements by Yugoslav officials and legislative bodies earlier
this year indicate that Yugoslavia may soon devalue its currency. In
April, for example, the Federal and Economic Chambers of Yugoslavia's
Federal Assembly adopted a resolution that called for adjustment of
"relations between domestic and foreign prices" so as to stimulate ex-
ports and bring about a more rational distribution of imports. In July,
Ljubisa Milanovic, Director of the Office for International Organization
Affairs of Yugoslavia''s Federal Secretariat for Foreign Trade, reportedly
stated that Yugoslavia planned to devalue its currency no later than the
end of 1964. In late August, Mika Spiljak, President of the Croatian
Executive Council, stated that devaluation was under consideration; although
no final decision had yet been made.
According to these and other reports, the rate of exchange will be
changed from 750 dinars to US $1 to at least 1, 000 and possibly as much
as 1, 200 dinars-to US $1.. < The dollar value of the dinar consequently
'x Devaluation would not necessarily affect the par value of the dinar,
which has been pegged at the artificial level of 300 dinars to US $1 since
the beginning of 1952 and is used only for statistical purposes.
C-O-N-F-I-D-E-N-T-I-A-L
Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
 Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
C-O-N-F-I-D-E-N- T-I-A-L
is expected to be reduced by at least one-fourth (from US $0. 00133
to US $0. 001). Because of selected cuts in export subsidies and im-
port tariffs, however, the average number of dinars actually paid
to domestic producers or by domestic consumers for one dollar's
worth of exports or imports probably would not increase as much
as the rate of exchange. Milanovic stated that export subsidies,
which are paid on about one-half of Yugoslavia's exports, are to be
cut from their present rates of 10, 22, and 32 percent (depending
on the product) to 5, 10, and 15 percent.
The present rate of exchange of 750 dinars to US $1 has been
in effect since the beginning of 1961. From 1954 until 1961 the basic
rate of exchange was 632 dinars to US $1. Various coefficients were
applied to this basic rate, ranging at the end of the period from 0. 5
to 3. 0, depending on the product, so that there was in reality a
multiplicity of rates of exchange. In the foreign trade reform of
1961 the new rate of 750 dinars to US $1 was made applicable to
all commodity transactions. However, wide differences between
dinar prices and world market prices were preserved by means of
a provisional system of import tariffs and export subsidies, and the
average number of dinars actually paid per dollar of imports or
received per dollar of exports changed little.
2. Benefits of a Devaluation
a. Improvement of the Foreign Trade Balance
By permitting Yugoslav goods to be offered at lower prices
abroad and by increasing the prices of imported goods in terms of
dinars, devaluation in general would promote exports and discourage
imports, thereby reducing the trade deficit. Yugoslavia has achieved
its high rate of economic growth with the help of substantial trade
deficits. The deficits amounted to US $197 million in 1962 and US $266
million in 1963, or 22 and 25 percent of total imports in the respective
years. Yugoslavia is able to finance a sizable trade deficit with earn-
ings from tourism, transportation, and other services and with credits
from the US and Western Europe, but the deficit so far this year is
uncomfortably large. By the end of October, imports exceeded exports
by the unprecedented value of US $407 million, or half again as much
as in all of 1963.
Such an increase in the trade deficit raises special difficulties
at this time because Yugoslavia is burdened with heavy external debt
C-O-N-F-I-D-E-N- T-I-A-L
Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
 Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
C-O-N-F-I-D-E-N T-I-A-L
obligations arising from past assistance. By the end of 1963, external
public debt (excluding accumulated interest) totaled about US $1.. 15
billion, 90 percent of which was owed to hard currency countries.
Debt repayment obligations will be particularly heavy during the next,
several years, probably averaging about one-sixth of the value of ex-
ports.
The growing trade deficit is largely the result of an expansion
of imports. Heavy internal demand, spurred by Yugoslavia's present
investment boom, pushed imports in the first 10 months of 1964 to.
27 percent more than their value in the same period last year. Raw
materials and semifinished goods have led the increase in imports,
followed by machinery and transportation equipment.
A substantial increase in prices of imported goods in terms
of dinars should do much to keep the growth of imports within bounds.
Assuming devaluation to 1, 000 dinars to US $1 and no change in tariff,
rates, there would be an increase of 33 percent in the dinar prices of
all imports. In practice the regime probably would hold the increase
below that figure for some products by cutting tariffs. Tariff cuts
might be desirable in order (1) to. limit increases in dinar prices of
imports essential to the economy, (2) to avoid excessive protection
of "infant" industries, and (3) to use foreign competition to curb
monopolistic tendencies in some Yugoslav industries.
Yugoslav exports have grown at a. moderate pace, increasing
12 percent from the first 10 months of 1963 to the first 10 months of
1964. Nevertheless, the growth of exports is lagging seriously behind
the growth of imports, is lower than in 1962-63, and has slackened in
recent months. Both the ability and the willingness of Yugoslav pro-
ducers to export have been weakened by rising costs and prices. From
September 1963 to September 1964, there were increases of about 30
percent, in average wages, 6 percent in industrial producers' prices,
and 29 percent in agricultural producers' prices. As costs have gone
up, some enterprises have found it more difficult to compete in foreign
markets. Moreover, high prices and strong demand have made sales
in the domestic market more profitable to producers, reducing their
incentive to export.
A substantial devaluation, such as is rumored, would stimu-
late exports considerably by increasing the profitability of exporting
goods that already are competitive abroad and by permitting other
goods to be offered at more competitive prices. If export subsidy
C-O-N-F-I-D-.E-N- T-I-A-L
Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
 Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
C-O-N-F-I-D-E-N- T-I-A-L
rates were cut as predicted by Milanovic, devaluation to 1, 000 dinars
to US $1 would permit subsidized exporters to reduce their prices
by 14 to 21 percent without reducing their proceeds in dinars for a
given quantity of exports.
b. Reduction of State Control over Imports
The rise in dinar prices of imported goods resulting from a
devaluation would reduce the extent of direct state controls necessary
to keep imports within any given limits. However, the greater the
reduction in direct controls, the smaller the improvement in the bal-
ance of payments, and, in view of the difficult current payments posi-
tion, it is likely that the regime will give priority to improving the
balance of payments.
Further liberalization of the economic system appears to
be a major objective of state policy in Yugoslavia, and the government
undoubtedly would like to reduce direct controls over imports, partly
in order to qualify Yugoslavia for full membership in GATT. There
are indications that Yugoslavia intends to use a program for trade
liberalization as a justification for foreign assistance, while using the
devaluation mainly to improve the balance of trade. Mil-anovic, for
example, emphasized that Yugoslavia would require hard currency to
carry out the devaluation and the subsequent reform of the system.
The US and the International Monetary Fund would be the most likely
targets of Yugoslav requests for assistance because Western European
countries probably would not assist Yugoslavia in a competitive cur-
rency devaluation as they did in the foreign trade reform of 1961.
c. Rationalization of the Structure of Production
To the extent that a devaluation would be accompanied by a
reduction in the level and differentiation of tariffs, export subsidies,
and direct state controls, it would tend to bring about in the long run
a more efficient allocation of Yugoslav resources. The present system
of tariffs, subsidies, and direct controls discriminates against the more
efficient producers and favors the less efficient producers. A reduction
in discrimination would lead to greater emphasis on agriculture, raw
materials, and light industries and to less emphasis on the manufacture
of machinery and equipment. Even if the government gave greater
scope to economic criteria and less to political considerations in the
allocation of resources, it certainly would continue to give considerable
advantages to some industries.
C-O-N-F-I-D-E-N- T-I-A-L
Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
 Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
C-O-N-F-I-D-E-N- T-I-A-L
3. Policy Alternatives
A substantial devaluation would ease, at least initially, Yugo-
slavia's pressing balance-of-payments problem. The only reason-
able short-term alternative appears to be a considerable tightening
of direct controls over foreign trade. Although such a solution is
by no means out of the question, it would be inconsistent with the
general line of Yugoslav policy, which points toward greater liber-
alization of the economy.
Whether or not the dinar is devalued soon, however, a lasting
improvement in Yugoslavia's balance of payments and in the struc-
ture of production will require greater restraint than in the past in
investment policy and more effective control over credit. In recent
months the regime has taken several steps to ease inflationary
pressures, including suspension of work on 266 investment projects,
restrictions on construction of administrative buildings, increases
in the compulsory budget reserves of local and regional units of
government, and stricter control over credits for enterpriser work-
ing capital and purchases of consumer durables. So far, however,
these measures have had little effect on the growth of investment ex-
penditures.
Unless inflationary pressures are greatly reduced, domestic
prices might rise quickly enough to nullify the favorable effects of a
devaluation on the balance of trade. To prevent this eventuality, the
government probably would tighten its control over prices and thereby
reduce the possibilities for adjustments in the structure of production.
It is likely that the rate of growth of investments will be reduced con-
siderably in the next several years, but investment policy involves
many economic interests and consequently is politically sensitive.
C-O-N-F-I-D-E-N-T-I-A-L
Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
 Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
C-O-N-F-I-D-E-N- T-I-A-L
Sources:
1. Prospective Currency Devaluation
"Resolution of the Federal Assembly on the Basic Guide-
lines for Further Development of the Economic System,
Yugoslav Survey, Apr-Jun 64, p. 2509. U.
State, Belgrade. Airgram A-94, 30 Jul 64. OFF USE.
State, Zagreb. Airgram A-26, 1 Sep 64. OFF USE.
Ibid., A-27, 1 Sep 64. OFF USE.
2. Foreign Trade
Yugoslavia, Federal Institute for Statistics. Statistics of
Foreign Trade of the FPR [later, SFR] Yugoslavia (bilingual
publication), Belgrade,annual volumes for 1962 and 1963. U.
Yugoslavia, Federal Institute for Statistics. Indeks, no 10,
1964, p. 32. U.
UN, ECE. Statistical Indicators of Short Term Economic
Changes in ECE Countries, Oct 64, p. 53-54. U.
UN, ECE. Weekly Supplement to the ECE Statistical
Indicators, 18 Nov 64. U.
3. Foreign Debt
State, Belgrade. Airgram A-1294, 12 Jun 64, enclosures.
OFF USE.
4. Foreign Trade System
International Monetary Fund. Yugoslavia - 1964 Article XIV
Consultations, 3 Sep 64, pt I, p. 26,, and pt II, p. 63. C.
State, Belgrade. Airgram A-365, 30 Oct 64. U.
25X1A
25X1A
C-O-N-F-I-D-E-N-T-I-A-L
Approved For Release 2000/05/12 : CIA-RDP79TO1003AO02100210001-4
 Approved For Release 2000/05/12 : CIA-RDP79T01003A002100210001-4
CONFIDENTIAL
CONFIDENTIAL
Approved For Release 2000/05/12 : CIA-RDP79T01003A002100210001-4
 Analyst: A/E
(Pro'ect 16. 5193)
Approved For Release 2000/05/12 : CIA-RDP79T01003A002100210001-4
:ieAOF 2. SEAM-'(`:H AND REPORTS 25X1A
.. 4is,rtlk~!
Q~A
t c.~ ~ Le.ment; December 1964
33
DAD/ RR
GROUP t
ded from automatic
~~TII bL_J
rrading a an0KRsai11Callon
tkxtir#on
280
173 25X1A CGS,/HR/Ops, 1G81, Hq.
174 LSJCR,_ for Leon Lew---Ins,
Bureau of International Programs, Rm.
25X1 C
175
176
177
1781- 181
182
183
184 186
187
188
189 - 191
2314, Main Commerce Bldg.
192 - 230 _ Filed in St/P/C
7 Dec, 64
z~G
-Approved For Release 2000/05/12 CIA-RDP79T01003A0021 002'1;0001-4
 Approved For Release 2
/ DP79T01003AO02100210001-4
%'U rj 'nc. T I i strI siS(C?.a'1Ca r,F rb,8l t f. t]it. Sl n: pP'Yrt Brt of s'Ir- 4 Y dSV
Prospoetivo Ci r ency -s u&t&.o ..~..,. a : _.
?: I I>r~te>Nrt~l.
t;'CSi kR 25X1A
1'2, - (-)/)DIeChester ("Go e
23 31 NSA-
32 NSA U
33 -)M 2-80 ORR 1) tr b ion, st/Al Document Support Section;.
.c)n : G.1 O9 i 59 Hclgtr'sv (sent direct to St/A/DS. 9 Doc 64).
istributed by OCR)
Nr r, 01"! 11
TIL
Approved For Release 2000/05/12 :
Excluded from automatic
dovagrading and
-RDP79T01003A002100210001-4
 CONFIENTIAL
Approved For Release 2000/05/12 : CIA-RDP79T01003A002100210001-4
St/AIDS Distribution of Current Support Brief No. 64-75, Yugoslavia's
P.roepactiye uyr nR y Devaluation --- Decerr 1964 CO ;tFIDEN L)
Copy No. Recipient
3k
35
36
37 - 41
42 - 47
48 - 53
54
55 - 59
60 - 65
66
67
76
78
80
81
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
103
106
107
- 75
- 77
- 79
- 102
- 105
ARfk
fkkudaft
Ch/E
St/PR
D/A (1 each branch)
D/MS (1 each branch)
D/R (1 each branch)
MRA
D/P (1 each branch)
D/F (1 each branch)
St/PS
D/I (1 each
BR/CR
FIB/SR/CR,
Library/CR
IPI/CR
VMR, _
AD/OO
GR/CR
branch)
Unit 4,
Analyst/Branch
D/GG
D/GC
D/GC /X
RID /AN,
St/P/A
St/FM
Room IG27, Hq.
25X1A
A/E)
Chief, OCR/FDD
CD/OO
OCI/SA/R, Room 5G19, Hq.
DDI/CGS, Room 7F35, Hq.
DDI/CGS/HR, Room 1G81, Hq.
0SI
OBI
DD/S&T/SpIN T
OTR/IS/IP, Room 532, Broyhill Bld . 1 -
NPIC/CSD/REF, Room 15518,
25X1A
25X1A
OTR/SIC)
Commandant National War College, Ft. Leslie McNair, Attn: Classified
Records Section, Rm. 26, National War College Building, Wash., D. C.
112 - 113 Assistant Secretary of Defense, ISA, Room 40825, Pentagon
114 - 152 Defense Intelligence Agency, DIAAQ-3, A Bldg., Arlington Hall Station
153 - 156 USIA, Warren Phelps, IRR/D, Room 812, Walker Johnson Building,
157 - 168
169 - 170
171 - 172
173 - 230
231 - 280
1734 New York Avenue, N. W.
State, INR Communications Center, Room 7818, State Dept. Bldg.
Dr. Neilson Debevoise, NSC, Room 365, Executive Office Building
Frank M. Charrette, Agency for International Development, Chief,
Statistics and Reports Division, Room A-204, State Annex #10
St/P/C/RR, Room 4F41, Hq. (held in St/P/C, 9 Dec 64).
Records Center
Approved For Release 2000/05/12 : CIA F G,1MI tG10J
dUW gra*g and
~~ $ tlarl -iiir.3Pion
Room 1B4004, Hq.
3A002100210001-4
 Approved For Releas
~WE AIA-RDP79T01003A002100210001-4
15 December 1964
M4ORA!DT14 FUR: Chief, ]Dissemination Control Branch, DD/CR
FRCS . Chief, Publications Staff, ORR
SUBJECT : Transmittal of Material
It is requested that the attached copies of CIA/RR CB 64-75,
Yugoslavia's Pros ctive Currency Devaluation, December 1964,
dential, be forwarded as follows:
State, IRR Communications Center,
Rom 7818, State Dept. Bldg.
Suggested distribution for
Thbassie.s in Moscow, Belgrade.
Geneva, London, Paris, and
Rome
25X1A
Attachments:
Copies #195. #200 of CB 64-75
cc: CGS/RB
Tr
The disscr: nat:or1 rc ;en % d by
this memorandum has been completed1
BY: ' '
y
Date:77J--J
t1(;UP 1
Approved For Relea CIA RD pt O3 3AO02100210001-4
ET ~` ? q de iassdpi inn
 r
Approved For Release MEW
(J91 No,, 16.5193
-.es CIA/RR CB 64-75
i ,le Yugoslavia's Prospective Currency Devaluation
Responsible Analyst and Branch A/E
Confidential)
25X1A
RECOMMENDED DISTRIBUTIOl TO STATE POSTS
Berlin.; Germany
Bucharest, Romania
Budapest, Hungary
M,ioscow. USSR
='s-?gue, Czechoslovakia
Sofia. Bulgaria
"Warsaw. Poland
Europe
\A elgra.de., Yugoslavia
Switzerland
Bonn, Germany
:Brussels., Belgium
Copenhagen, Denmark
Frankfurt, Germany
,Geneva. Switzerland
;t-I, 1. s inks, , Finland
The Hague, Netherlands
Lisbon, Portugal
,,tbndon, England
Luxembourg, Luxembourg
Madrid, Spain
1.os.
O Norway
Eris, France
/ ome. Italy
Stockholm, Sweden
Vienna. Austria
Wellington, New Zealand
Manila, Philippines
C anberra. Australia
ourne, Australia
Far East
Bangkok, Thailand
Djakarta, Indones.a
Hong Kong
Rangoon, Burn a
Kuala Lumpur,, Malaya
Saigon, Vietnam
Seoul, Korea
Singapore, British Malaya
Taipei, Formosa
Tokyo, Japan
Vientiane, Laos
Phnom Penh, CC aznbodia
Colombo. Ceylon
Ankara, Turkey
Athens9 Greece
Cairo, Egypt
Damascus, Syria
Kabul, Afghanistan
Karachi, Pakistan
New Delhi, India
Nicosia, Cyprus
Tehran, Iran
Baghdad. Iraq
Tel Aviv, Is ra.el
Beirut. Lebanon
Amman, Jordon
Jidda, Saudi Arabia
Ottawa, Canada
%-RDP79T01003A002100210001-4
Mexico
Guatemala
Panama
Brazillia, Brazil
Buenos Aires, Argentina
Bogota, Colombia
Santiago, Chile
La Paz, Bolivia
Montevideo, Uruguay
Caracas, Venezuela
Africa
Yaounde, Cameroun
Leopoldville, Congo
Addis Ababa, Et;hopia
Accra, Ghana
Abidjan, Ivory Coast
Nairobi, Kenya
Monrovia, Liberia
Tripoli, Libya
Rabat, Morocco
Lagos, Nigeria
Mogadisoio,, Somal
Khartoum, Sudan
Tunis, Tunisia
Pretoria, South Africa
Algiers, Algeria
Cotonou, Dahomey
Dakar, Senegal
Bamako.. Mali
GROUP t
rr -- Excluded troin automatic
Approved For ReleasC 1J tt kkl R? I~?1' 03A002100210001-4
 ApQQW('2100210001-4
Subject !
Analyst and Branch
25X1A
SECURITY '.~Y 6(
Date Initials
Unedited draft
Edited draft
Other
0 Text check
b. Source check
C. Releasable to.
DISTRIBUTION
#l sent to AD/RR
#2 sent to DDI
#3 checked for release
OL/PSD notified to Disseminat
25X1A
S- C R.-E-T
Approved For Rel ase 20 0/0 /12 : CIA-RDP79TO1003AO02100210001-4