Inside Story: Inflation hero is man in a billion: When retired banker Dragoslav Avramovic came to the rescue, Serbs were using their worthless currency as wallpaper. He tells Richard Thomson how he brought the runaway dinar to heel

'IT IS quite pleasant being the most popular man in Yugoslavia,' reflects Dragoslav Avramovic with a broad smile and only a hint of overstatement. 'But my wife hates it. She doesn't see why I have to spend my time, at my age, doing all this.'

Mr Avramovic is a sprightly 74, but despite his age he has, over the past eight months, become a national hero. What is all the more strange about this late flowering is that he is neither a politician nor a soldier, nor a man of God, but - of all things - governor of the national bank.

He looks neither like a central banker nor a hero. When we met in the bar of the Hotel Moskva in central Belgrade he was dressed in old cords and a grey polo-neck, under a lumberjack shirt that he seemed to have forgotten to tuck in. He carried his papers not in a smart leather briefcase but a white plastic carrier-bag.

Yet few central bankers have had to confront the kind of epic task that faced Avramovic in January. At the start of the year, the war-wracked and sanctions- starved economy of Yugoslavia (defined these days as Serbia and Montenegro) was in the grip of the worst hyper-inflation ever seen in Europe. It was the kind of economic chaos that makes the inflation of 1920s Germany or the more recent inflations in Brazil and Argentina look like a Sunday afternoon picnic.

After weeks of dithering, the government called in Avramovic, who fixed the problem in a matter of days. In financial terms, this was a feat of herculean proportions. To ordinary Serbs, it seemed a miracle. Even Avramovic's critics concede he is something close to a genius. He himself claims to have discovered a new formula for conquering hyper-inflation.

The story of Yugoslavia's brush with economic disaster began with the break-up of the Balkans from 1990 onwards. The economies of Serbia and Montenegro were severely weakened by being cut off from their traditional internal markets of Croatia and Slovenia. In 1992, the imposition of trade sanctions cut them off from international markets too. At the same time, the cost of the war with its neighbours sent Serbian government spending spiralling upwards. So too did the unreformed nature of the old communist economy, in which the government supported inefficient state-owned industries that were increasingly unable to produce profits.

By early 1993, with the government deficit mushrooming, inflation was running at between 100 and 200 per cent. The faith of Yugoslavs in their currency, the dinar, was wavering and the German mark, the unofficial reserve currency, was replacing it in everyday transactions.

'The situation was still thought to be manageable,' says Juri Bajec, professor of economics at the Belgrade Institute of Economics. 'It was still within the realms where politicians thought they could control it by pulling the usual policy levers.'

But control did not last long, as the government did almost everything wrong. When the harvest came in July, the economy cracked. Worried that Serbian cities might starve during the winter, the government announced that it would buy a million tons of the wheat harvest from private farmers at guaranteed prices.

'We warned them what would happen if they paid in cash,' Bajec says, 'but they did not listen.' The entire country, now highly attuned to living with an unstable currency, realised what this would mean. The government could only pay by printing a lot more money, which the peasants would switch into marks the moment they were paid. It would, in short, kill the currency.

Sure enough, three times during July, the dinar / mark exchange rate lurched downwards. Then it spun out of control.

The exponential growth of inflation during those months still astonishes even the Yugoslav economists who had seen it coming. Between July and the end of the year it went from 500 per cent to 2,000 per cent a month, to 20,000 per cent, then 500,000 per cent and onwards. By January, prices were rising faster than 100 per cent an hour.

At the final assessment before the recovery plan was put into effect on 24 January, the monthly inflation rate had reached a mind- blowing 302 million per cent. Compare that with the inflation rate in Germany before the Second World War, which, at its height in 1924, reached only 332 per cent per month, while inflation in Latin American countries during the 1980s never went beyond 300 per cent per year.

'Everyone became an expert at fighting inflation, which of course made the macro-situation worse,' says Bajec. At first, people formed vast but orderly queues at the banks to change their dinars into marks. When the banks ran out of marks each day, they closed their doors. Then they ran out altogether and the exchange market moved on to the streets, with private dealers.

'You had to get your salary paid in cash,' says Bajec, 'then run to the street dealer and buy a couple of marks or run to the shop and spend it.' The value of the dinar fell hourly. 'If I got paid in the morning and my wife got paid in the evening, I came home with more marks than she did. You had to be fast.'

It became common practice to take out dinar bank loans, switch them into marks, wait a couple of days and switch back into dinars at two or three times the previous rate. Companies began doing this on a huge scale, as the only way to produce enough cash to pay their workers.

The only rational activity, if you did not join the exchange queues, was shopping. It became an economic imperative to spend it all before it became worthless. People would go on sprees, writing out 20 or 30 cheques at a time to the maximum amount allowed. By the time the cheques were cleared a few days later they would be worth relatively little in comparison with their owners' rapidly inflating salaries. Consequently, cash prices in the shops were lower than prices for cheques.

After a few weeks of hyper-inflation, some shops refused to sell for anything but marks. Many decided there was no point in selling at all and illegally hid their stocks from the public. Others simply sold out for hard currency. 'You got lorries from Bulgaria and Macedonia pulling up at the back door of some shops and buying up their entire stock for next to nothing in foreign currency,' Avramovic says.

Industry, meanwhile, ground to a halt. It was simply not worth making, let alone selling, anything since the cost of production was constantly out of sync with the price at which goods could be sold.

The only people to do well out of the chaos were the mafia, who profiteered on a vast scale, while the government could do little to stop them. A large black economy based on hard currency had already grown up around sanctions- busting and war profiteering. These operators now moved mercilessly into the chaos created by hyper-inflation, using their foreign currency to make huge profits. Their legacy is still to be seen on the streets of Belgrade in the new Mercedes and Porsches that occasionally sweep past the decrepit Yugos and Fiats in the traffic.

Aware that it had lost control, the government behaved like a terrified rabbit caught in the headlights. 'They were paralysed. Tax income was so worthless there was no point collecting it. When you have lost control, the only resources left to you are the printing presses at the national bank. The government could think of nothing to do but print more money,' Bajec says.

And the printing presses proved to be astonishingly efficient. The Yugoslav National Bank obligingly printed notes of bigger and bigger denominations with amazing speed. Since the bank could not design new notes fast enough, old notes were repeatedly recalled and overprinted with more zeros as their value depreciated. From time to time, the bank knocked off zeros by revaluing the dinar, but they only grew back. In January, it produced its masterpiece: a bright orange note, denomination D500bn (D500,000,000,000).

By then, however, ordinary Yugoslavs had stopped counting. Some used their worthless banknotes as wallpaper. 'I got to the stage where I didn't know what anything cost and I didn't know what money was worth,' says Ljubomir Madzar, economics professor at Belgrade University. 'I would just hold out a handful of money to the shopkeeper and say, 'Here, take what you need.' '

Inevitably, there was hardship. Real wages and salaries were worth next to nothing. Professor Madzar's monthly salary was worth the equivalent of DM8 ( pounds 3.25) by last December. But as always in periods of inflation, it was those on fixed incomes - particularly pensioners - who suffered most. 'People were desperate,' says Bajec. 'You get that way when your entire monthly pension only buys two eggs.'

It still puzzles many Serbs that there was no popular unrest or protest against the government during the months of inflation. Ordinary life had been disrupted, thousands thrown out of work, goods withdrawn from shops, all largely as a result of government policy - and yet no one took to the streets against the regime. The reason seems to have been partly that the hyper-inflation induced a kind of collective bewilderment that paralysed their will to protest. Another equally powerful reason was that survival in such conditions took all their time and energy. The government, meanwhile, beat the nationalist drum as it always did, blaming the entire fiasco on trade sanctions imposed by a hostile international community on long- suffering Serbs.

Yet no one starved. Serbia is still an agricultural society, and many town-dwellers had relatives in the countryside who could send them food. Fortunately, the 1993 harvest had been abundant.

'People would pull out Grandma's old cookbooks which they hadn't looked at for years,' says one Serb, 'with the old recipes they used to use when times were hard in the old days.'

Many people also had savings in marks that helped them eke out their dwindling salaries, although even here the state had caused more hardship than necessary. Over the previous two years, desperate for foreign exchange, the government had encouraged people to put their marks on deposit with the banks. It collected around dollars 4bn in marks this way, and spent it all to fund its deficit. When depositors tried to withdraw them at the height of the inflation, therefore, they could not be paid. Inevitably, barter became a way of life for many people.

D esperate for a solution to the chaos, President Slobodan Milosevic brought in Avramovic as an adviser. In January he appointed him governor of the national bank.

'It was a privilege to be asked,' Avramovic comments. He is obviously surprised and delighted by his current role, which he regards as the most important thing he has ever done. 'It's like being a racehorse. You spend years training for the five minutes of real action,' he says.

He had a distinguished, useful career which never quite rose to the heights. He worked as an economist for the Yugoslav government after the war, then spent 23 years at the World Bank, where his dealings with Latin America made him something of a connoisseur of hyper-inflation. It was only after his retirement in 1989 and the onset of the inflation crisis that he suddenly had the chance to be a national hero.

In August last year, the government asked him to construct an anti-inflation programme. His solution was first to stabilise the currency, and only then to attack government overspending. 'The conventional model is to cut government spending first. This is what the World Bank would do, but their model is perverted. It causes deflation, riots and starvation,' he says dismissively of his old employer.

On 24 January his plan was implemented. The printing presses stopped. A new dinar was issued and to encourage confidence in it, full one-to-one convertibility with the mark was promised. This was a considerable risk, since the government's reserves were dangerously low and there was no chance of borrowing abroad. The old dinar was kept on temporarily, at a rate of 12m to one new dinar.

Critics scoffed, claiming the plan either would not work or would collapse within days, but they did not take account of the population's yearning to believe in a stable currency. For two or three days prices wobbled. Then they levelled out and started to fall. Within a week, inflation had stopped dead.

'And we did it without borrowing a penny from abroad,' Avramovic says proudly. 'Anyway, no one would have lent us anything, so we had to do it on our own.'

The new dinars were fed out gradually through the pay-packets of public employees. Government spending was automatically slashed, because wages and salaries in the new currency were so low. Indeed, pay was so little at first that after covering living expenses, few people had any money left over to convert into marks even if they had wanted to, which all helped to give the impression of a stabilised currency.

The national bank was prohibited from lending to the government, so that a new deficit could not build up, and within weeks tax revenues revived as companies went back to work.

'The government now believes in monetary stability more than the Germans,' Avramovic says. 'I have to keep telling them there are other things in life too.'

By August, a triumphant government was claiming industrial production had risen 50 per cent since 24 January. Inflation, at the last count, was down to just 0.2 per cent. In all outward respects, the plan appears to have been a stunning success. Looking at the placid streets of Belgrade, where the crowds stroll in the late summer sunshine, the shop windows are full of goods and the roads jammed with cars, it is hard to believe that only a few months ago the economy was as close to collapse as it is possible to come.

On the surface, not even trade sanctions seem to make much of a difference. 'If you offer a profit of 25 per cent, you'll get money from the Moon. On the black market, profits are more like 40 per cent, so there will always be people to find ways around sanctions,' Avramovic says. 'Sanctions don't work.'

Yet there are still critics who believe the miracle has all been done with mirrors. Ljubomir Madzar of Belgrade University points out that although industrial production has shot up, it is still lower than a year ago. About half of the working population is still on enforced leave, a kind of paid unemployment, which is inflationary. Above all, prices did not fall as far as they should have and are beginning to rise again, and salaries have increased too rapidly.

'The deficit is growing again to pay for this. Our research suggests we may already have passed the point of equilibrium. An average wage of D150 would give stability, but the average has already risen to D182.' The archaic structure of Serbia's economy remains unreformed and it is still isolated. It is only a matter of time, Madzar believes, before inflation takes off again.

Worst of all, perhaps, is the fear of most Serbians that, as in Latin America, the black marketeers have infiltrated the government. There are, for instance, rumours of lorry owners paying D5,000 for permission to bring petrol over the border from Macedonia. Two ministers have been removed for profiteering. If Serbian politicians have indeed become more interested in their own profit than the country's problems, Serbs may have to learn to live with endemic inflation like some Latin American countries.

For the moment, however, after the turmoil of last year, Serbs are simply thankful to have money that is worth something. 'Even if we are not completely successful,' Avramovic says, 'it was good while it lasted.'

(Photograph omitted)