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