| The exchange rate of the Macedonian Denar against | | | | Another aspect: foreign credits are a competition to |
| the major hard currencies of the world has remained | | | | credits provided by the local banking system. If firms |
| stable in the last few years. Because of the IMF | | | | and individuals do not take credits from the outside |
| restrictions, the local Narodna (Central) Bank does not | | | | because they fear a devaluation - they help to |
| print money and there are no physical Denars in the | | | | create a monopoly of the local banks. Monopolies |
| economy and in the local banks. | | | | have a way of fixing the highest possible prices |
| Thus, even if people want to buy Foreign Exchange | | | | (=interest rates) for their merchandise (=the money |
| in the black market, or directly from the banks - they | | | | they lend). |
| do not have the Denars to do it with. | | | | Access to foreign credits reduces domestic interest |
| The total amount of Denars (M1, in professional | | | | rates through competition with the local credit |
| financing lingo) in the economy is around 200,000,000 | | | | providers (=banks). |
| USD, according to official figures. This translates into | | | | It would be easy to conclude, therefore, that it is an |
| 100 USD per capita. Thus, even if each and every | | | | important interest of a country to be open to foreign |
| citizen of Macedonia were to decide to convert ALL | | | | financial markets and to provide its firms and citizens |
| their Denars to Deutsch Marks - they would still be | | | | with access to sources of foreign credits. |
| able to buy only 150 DM each, on average. These | | | | One important way of encouraging people (and firms |
| tiny amounts are not sufficient to raise the rate at | | | | are made of people) to do things - is to allay their |
| which DMs are exchanged for Denars (=the price of | | | | fears. If people fear devaluation - a responsible |
| DMs in Denars). | | | | government can never promise not to devalue its |
| But will this situation last forever? | | | | currency. Devaluation is a very important policy tool. |
| According to economic theory scarcity raises the | | | | But the government can INSURE against a |
| price of the scarce commodity. If Denars are rare - | | | | devaluation. |
| their price will remain high in DM terms, i.e. they will | | | | In many countries of the West, one can buy and sell |
| not be devalued against the stronger currency. The | | | | insurance contracts called forwards. They promise |
| longer the Central Bank does not print Denars - the | | | | the buyer a given rate of exchange in a given date. |
| longer the exchange rate will be preserved. | | | | But many countries do not have access to these |
| But a strong currency (the Denar, in this case) is not | | | | highly sophisticated markets. |
| always a positive thing. | | | | Not all the currencies can be insured in these markets. |
| The Denar is not strong because Macedonia is rich. | | | | The Macedonian Denar, for instance, is not freely |
| The country is in a problematic economic situation. | | | | convertible, because it is not liquid: there are not |
| The banking system is perilous and unstable. The | | | | enough Denars to respond to the needs of a free |
| reserves of foreign exchange are minimal - less than | | | | marketplace. So, it cannot be insured using these |
| 30 million USD. | | | | contracts. |
| The currency is stable because of externally imposed | | | | These less privileged countries establish special |
| constraints and an artificial manipulation of the money | | | | agencies which provide (mainly export) firms with |
| supply. | | | | insurance against changes in the exchange rates in a |
| Moreover, a strong currency makes goods produced | | | | prescribed period of time. |
| in Macedonia relatively expensive in outside, export | | | | Let us examine an example: |
| markets. Thus, it is difficult for Macedonian growers | | | | The firm MAK buys combines and tractors from |
| and manufacturers to export. When they sell their | | | | Germany. It has to pay in DMs. |
| goods in Germany, they get DM for them and when | | | | An international development bank offered to MAK a |
| they convert these receipts into Denars - they get | | | | loan to be paid back in 7 years time in DM. |
| less then they should have if the Denar reflected the | | | | Today, MAK would be so afraid of devaluation, that |
| true relative strengths of the two economies: the | | | | it would rather pay the supplier of the equipment as |
| German one and the Macedonian one. | | | | soon as it has cash. This creates cash flow problems |
| They pay expenses (e.g.: salaries to their workers, | | | | at MAK: salaries are not paid on time, raw materials |
| rent, utilities) in Denars. These expenses grow all the | | | | cannot be bought, production stops, MAK loses its |
| time as true inflation grows (as opposed to the | | | | traditional markets - and all in order to avoid the risks |
| official rate of inflation which is suspiciously low) - but | | | | of devaluation. |
| they keep getting the same amount of Denars for | | | | But - what if the right government agency existed? |
| their produce and products when they convert the | | | | If governmental insurance against devaluation existed |
| DMs which they got for them. | | | | - MAK would surely take the 7 year loan. It would |
| On the other hand, imports to Macedonia become | | | | take, let's say, 10 million DM. |
| relatively cheaper: it takes less Denars to buy goods | | | | MAK would apply to the governmental agency with |
| in DM in Germany, for instance. | | | | its business. |
| Thus, the end result is a growing preference for | | | | It would pay the government agency a yearly |
| imports and a decline in exports. In the long term, | | | | insurance fee of 2.5% of the remaining balances of |
| this increases unemployment. Export is the biggest | | | | the loan (as it is amortized and reduced with each |
| driving force in creating jobs in modern economies. In | | | | monthly payment). This would be considered a |
| its absence, economies stagnate and dwindle and | | | | proper financing expenditure and the firm will be |
| people lose their jobs. | | | | allowed to deduct it from its taxable income. |
| But an unrealistic exchange rate has at least two | | | | The government will provide MAK with an insurance |
| additional adverse effects: | | | | policy. An exchange rate (let us say, 30 Denars to |
| One - as a rule, various sectors of the economy | | | | the DM) will be stated in the policy. |
| borrow money to survive and to expand. | | | | If - at the time that MAK had to make a payment - |
| If they expect the local currency to be devalued - | | | | the rate has gone above 30 Denars to the DM - the |
| they will refrain from taking long term credits | | | | government will pay the difference to MAK in DM. |
| denominated in hard currencies. They will prefer | | | | This will enable MAK to meet its obligations to its |
| credits in local currency or short term credits in hard | | | | creditors. |
| currencies. They will be afraid of a sudden, massive | | | | MAK will be able to cancel this insurance at any time. |
| devaluation (such as the one which happened in | | | | If, for instance, it suddenly signs a major contract |
| Mexico overnight). | | | | with a German buyer of its products - it will have |
| Their lenders will also be afraid to lend them money, | | | | income in DM which it will be able to use to pay the |
| because these lenders cannot be sure that the | | | | loan back. Then, the government insurance will no |
| borrowers will have the necessary additional Denars | | | | longer be needed. |
| to pay back the credits in case of such a devaluation. | | | | This very simple government assistance will have the |
| Naturally, a devaluation increases the amounts of | | | | following effects: |
| Denars needed to pay back a loan in foreign | | | | - It will encourage firms to obtain foreign credits. |
| currency. | | | | - It will create competition to the local banks, reduce |
| This is bad from both the macro-economic vantage | | | | interest rates and encourage a wider and better |
| point (that of the economy as a whole) - and from | | | | range of services offered to the public. |
| the micro-economic point of view (that of the single | | | | - It will encourage foreign financial institutions to give |
| firm). | | | | loans to local firms once the risk of re-payment |
| From the micro-economic point of view short term | | | | problems due to a devaluation is minimised. |
| credits have to be returned long before the | | | | - It will place Macedonia in the ranks of the more |
| businesses which borrowed them have matured to | | | | developed and export oriented countries of the |
| the point of being able to pay them back. These | | | | world. |
| short term obligations burden them, alter their | | | | - It will facilitate activities with longer term credits |
| financial statements for the worse and sometimes | | | | (such as modernization of plants for which longer |
| put their very viability at risk. | | | | terms of payments are required). |
| From the macro-economic point of view, it is always | | | | As time goes by, the private sector may step in and |
| better to have longer debt maturities with less to | | | | supply its own insurance against devaluation . |
| pay every year. The longer the credits a country | | | | Insurance firms the world over do it - why not in |
| (single firms are part of a country) has to pay back - | | | | Macedonia which needs it more than many other |
| the better its credit standing with the financial | | | | countries? |
| community. | | | | |