CEOL - Montenegro Faced With Problems After Currency Move

BELGRADE, Nov 12, 1999 -- (Reuters) A week after legalizing use of the German mark as a parallel currency, Montenegrin people are grumbling about rising consumer prices and analysts say the plan could backfire.

Workers at the republic's crucial aluminum plant staged a protest this week to demand better pay, complaining that their wages in marks were too low.

"This is chaos. They (the government) never analyzed the consequences," said Nebojsa Medojevic of the G17 group of independent economists.

The Monetary Council of the coastal republic on Thursday pushed the dinar down to 17.5 per mark after keeping it at 17.0 for a week. Street dealers were buying the German currency at 17.5 and selling it at 18.0 dinars.

"The change is a result of market movements," Monetary Council member Bozidar Gazivoda told Reuters.

He said concern over social problems kept the monetary body from deciding on more dramatic changes of the exchange rate.

Montenegro, partner to Serbia in the Yugoslav federation, launched the dual currency system on November 3, setting up its own central bank and monetary council to ensure monetary stability.

It said it wanted to protect the economy from high inflation spilling over from Serbia, while stable finances would help its pro-Western leadership proceed with reforms.

In Belgrade, the Yugoslav central bank reacted by stopping payments between Serbia and Montenegro, determined to keep the ban until it is allowed back to control Montenegrin banks.

But Gazivoda said Montenegro would not allow Belgrade to control its finances, adding: "Should those who produce inflation be allowed to control us?"

Wages, prices in German marks

A week after the move, life for ordinary Montenegrins has changed. Shops display prices in marks and Serbian goods are gradually being replaced by foreign brands, mainly Slovenian.

Podgorica spent DM 14 million last week to pay wages and pensions in marks. Unconfirmed media reports said the Bundesbank shipped DM 47 million to Montenegro to help.

Meanwhile, restricted access to goods and funds from Serbia pushed consumer prices higher. The minimum wage of DM 50 compared to the price of DM 419.5 for a monthly food basket, calculated by a local trade union.

Independent economists said the monetary move was premature.

"Instead of surprising (Yugoslav President Slobodan) Milosevic, they've surprised the local firms," said Medojevic.

"Not a single proclaimed economic aim has been met. There is no monetary sovereignty without your own currency, prices have jumped and the black market still exists as there is no internal convertibility. We are not a sovereign state," he said.

Currency plan could backfire

While the move was initially seen as an effort to step up pressure on Milosevic, boost Montenegro's position in talks on reshaping Yugoslavia and please voters with a more determined stance, the monetary autonomy could backfire, analysts said.

Workers at the Podgorica Aluminum Plant (KAP), managed by Swiss commodities trading house Glencore, protested on Wednesday over low wages, averaging 319 marks per month.

Foreign businessmen were also unimpressed.

"A stable currency is fine, but in the case of Montenegro it will not improve overall sentiment and encourage investors," an international banker told Reuters.

"Large institutional investors do not focus on the region at all. One day, Montenegro may become interesting for a small Austrian bank. But large investors have lost appetite for small markets," he said.

Another banker described the dual currency system as a first step. "But they must go all the way. An independent economy means an independent state."

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