April 27, 1992 Vreme News Digest Agency No 31
Serbia's War Finance
by Miroljub Labus, Professor of Economics at the Law School, University of Belgrade
Serbia is not at war, the Serbian government claims, but the fact remains that it had entered this non-existent war with "ill" finances
There are several ways of financing a war, but no small nation has yet found a way to pay for its war expenditures from current tax revenues, or to transfer them to someone else's account. Lending money from allies or raising funds on the capital market, along with mortgaging a nation's wealth, implies a direct transfer of war expenditures to future generations which would have to repay the debt in peace-time. The financing of a war by issuing money, as a last resort, also burdens future generations, for it destroys the country's financial system, and if the war is lost, directly leads into hyper inflation with long-term negative effects on the economy.
Serbia is not at war, the Serbian government claims, but the fact remains that it had entered this non-existent war with "ill" finances. There were many reasons for restraint before such a decision was reached, and even if all reason had to be set aside, the poor financial situation should have represented the last, insurmountable, obstacle. However, emotions have prevailed over reason, bad finances have speeded up the defeat and are threatening to completely destroy the country's monetary system. War operations are mostly financed by increasing the money supply, while the remainder of the necessary funds are drawn from the (already scarce) hard currency reserves and, according to rumors, obtained by gold sales abroad.
In financing this particular war, the national budget has been practically divided into two parts: ordinary and extraordinary. This division remained under the disguise of the Federal State, i.e. the war was financed from the budget of Yugoslavia (the extraordinary part), while the Republic of Serbia maintained the ordinary budget. The actual extraordinary war budget deficit exceeded its planned figure. For example, in the first quarter of 1992, the actual money supply exceeded its expected level by 60%.
Serbia could not have obtained foreign loans for waging a war since it had no allies, and even if it did, the preservation of healthy finances and securing a sound national currency could hardly have been attained within such a financial system, characterized by budget deficits and a complete absence of financial discipline.
A state of a direct war threat was imposed in the country, and by Serbian government decrees the economy was practically operating under conditions of war. Under such circumstances, the usual measures of price freeze and scarce commodity rationing were not adopted. Instead, partial price and foreign trade regulation were imposed. In a situation where national territory was shrinking and total tax revenues decreasing, the Serbian government was behaving as though Serbia was really not at war, and is taking over the liabilities of bankrupt, state-owned firms. Such uncoordinated economic policy has inevitably lead to a budget deficit.
In this way, the only feasible alternative for financing the war budget of the remainder of Yugoslavia was by increasing the money supply. This is the primary cause of the present-day hyper inflation. Things are not running smoothly for the financiers and the military. History tells us that hyper inflation lasts for a limited period of time, after which the monetary system falls apart, thereby eliminating the source of financing the war. Those who have lead Serbia into this war must have known that. The break up of the monetary system will remove the source of financing the war, and will at the same time create grave disturbances in the economy whose consequences will be felt by future generations. Thus, economics will prevail over politics again.
The grave injustice is that those who are presently incurring the costs of war will not be the ones who will be paying them tomorrow.