Finance:Hyperinflation in Yugoslavia

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Between 1992 and 1994, the Federal Republic of Yugoslavia (FRY) experienced the third-longest period of hyperinflation in world economic history. This period spanned 22 months, from March 1992 to January 1994. Inflation peaked at a monthly rate of 313 million percent in January 1994.[1] Daily inflation was 62%, with an inflation rate of 2.03% in 1 hour being higher than the annual inflation rate of many developed countries. The inflation rate in January 1994, converted to annual levels, reached 116,545,906,563,330 percent (116.546 billion percent, or 1.16 × 1015 percent). During this period of hyperinflation in FR Yugoslavia, store prices were stated in conditional units – point, which was equal to the German mark. The conversion was made either in German marks or in dinars at the current "black market" exchange rate that often changed several times per day.[2]

The concept of inflation

Main pages: Finance:Inflation and Finance:Hyperinflation

The word "inflation" originates from the Latin word "inflare," meaning to blow or expand.[3] The word inflation, in the sense of inflating money circulation, was used for the first time in economic literature in the book, "The Big Paper Deception or the Approximation of a Financial Explosion" published by Alexander Demler[4] in New York in 1864. The book was published during the American Civil War where, due to four years of conflict between the North and the South, there was massive destruction and almost complete paralysis of the economy. Due to its inability to provide funds for financing military expenditures, the government resorted to issuing paper money without cover which caused rapid growth of prices and deterioration of the value of domestic currency.[5]

Since then, inflation has continued to be a frequently debated political topic and there exists extensive economic literature on the phenomenon. The reason for this lies in the fact that inflation is constantly present in contemporary economies and also because of the many controversial attitudes about inflation. There are severe disputes about its causes, manifestations, consequences, and measures for its removal. The classic concepts define inflation as a situation in which, due to an increase in money circulation, there is a decrease in the value of money, which in turn causes prices to increase. The reason for this is the fact that all of the large-scale inflation at that time was related to excessive money (paper money) emissions and that the huge monetary funds that were standing against the limited commodity funds were created on the market. In other words, a situation has arisen in which "too much money goes for too much quantity of goods."[6] Modern understandings point to the fact that inflation also occurs when this does not manifest itself in a general increase in prices. This is best seen in the former socialist countries in which there was a strong state price control. The prices remained stable but the shortcomings of certain commodities appeared on the market. However, any increase in monetary circulation and in free-market market economies does not automatically have to lead to a general increase in prices. This is inevitable only in a situation where we have a lot of capacity utilization and full employment of the labor force. On the other hand, a general increase in prices can also occur in cases when there is no increase in money circulation. This is due to distortions in the distribution of national income, the balance of payments and other segments where inflationary pressure arises which leads to a general increase in prices and without a rise in the money supply.

Yugoslav experiences with stabilization programs

Yugoslavia in its recent history applied both programs of stabilization. The first – heterodox – at the end of the existence of the Socialist Federal Republic of Yugoslavia [SFRY] and the other – orthodox – at the beginning of the Federal Republic of Yugoslavia [FRY]. Both were relatively successful and were a solution in the short-term, however they were not successful in the long term, which caused them to collapse. The first program was adopted in the late 1980s under the name Economic Reform Program. Already at the beginning of 1994, another stabilization program under the name Monetary Reconstruction Program and Economic Recovery (known as the "Avramović Program[7]") was in effect. The other solution was passed in late 1989 when, for the most part, due to total price liberalization, Yugoslavia was hit by hyperinflation. The monthly price level increased from month to month and in December 1989, the inflation percentage was 45%. There was a constant rally in prices, wages and exchange rates. In such a situation in December 1989, the Economic Reform Program and measures for its implementation were adopted. The basic measures envisaged by this program were restrictive monetary policy and real positive interest rates, independence of the National Bank of Yugoslavia, denomination of the dinar by "deleting" four zeros, proclaiming convertibility of dinar and fixing of the dinar exchange rate against the German mark in the ratio of 7:1, freezing of nominal wages for a period of 4 months, freezing of the prices of some inputs (energy products and infrastructure) for a period of 4 months, further foreign trade and fiscal account liberalization, rehabilitation of banks and companies through a special fund that would be formed with foreign financial support, negotiations with the Paris Club of Creditors about debt restructuring, and the International Monetary Fund and the World Bank for a loan to help stabilize the economy.[7] In the short term, or at the beginning of the application, the program showed some good results: there was a significant slowdown in price and salary growth, foreign exchange reserves, whose level was significant even before the beginning of the application of the Program, they started to grow, marked positive progress in reducing the foreign trade and budget deficits, etc. However, from the very beginning, there is a decline in industrial production and employment, and somewhat later, the initial positive results are also lacking (as a result of the rebound in prices and wages and the appearance of the "black" exchange rate, the foreign exchange reserves are beginning to decrease rapidly, negative tendencies in the foreign trade and budget sphere, etc.) and it soon became clear that the Program of Ante Marković would fail.[7] The fate of this stabilization program was largely tied to stopping price growth. It was considered that only the prices of the main inputs were to be frozen, and in the conditions of restrictive monetary policy and liberalized imports there would be no growth in other freely formed prices, and even companies were expected to reduce prices in order to provide liquid assets. However, expectations did not materialize and the prices recorded significant growth (the truth is noticeably smaller than before the program was adopted), which led to a rise in wages that (at the very beginning of the implementation of the Program) grew faster than price growth. In circumstances where this happens, it continues to persist on, one of the key elements of the Program – a fixed exchange rate. All this leads to a weakening of the competitiveness of the domestic economy, as exports become economically unfeasible, and imports are very lucrative. Bearing in mind that there has been a liberalization of imports, the domestic market is "overwhelmed" with imported products, which are absorbed by increasing domestic demand, almost exclusively for consumer goods fueled by rapid wage growth. Imports of goods become cheaper than domestic ones, so there is a decline in production because our products are not competitive at all, not only in exports but also in the domestic market. After only 1.5 years of implementation, industrial production was reduced by 25% and unemployment increased by 18%. This further lead to strong recession movements in the economy, deterioration of the foreign trade balance and, (after initial increase), a rapid reduction in foreign currency reserves, which prevents further "defending" of the foreign exchange rate.

Dragoslav Avramović's program

Dragoslav Avramović signature

Program professor Dr. Dragoslav Avramović (Monetary Reconstruction and Economic Recovery Program) was adopted in early 1994 after a record hyperinflation that Yugoslavia had previously experienced. It was Yugoslavia in the period 1992–1994. It recorded a hyperinflation in world economic history in the third place, in terms of the duration of the 22 months (March 1992 – January 1994), and at the maximum monthly level (January 1994) of 314 million, or more precisely 313,563,558 percent. Such devastating hyperinflation resulted in a drastic deterioration of all important economic indicators. Only in 1993 was a decline in GDP of 30%, a decrease in investments and industrial production of 37%, and unemployment reached 24.1%. At the same time, there is a huge budget deficit in a situation where public revenues are rapidly decreasing (the decline in tax base due to the decline in economic activity, and – due to sanctions – a significant increase in the "gray economy", which is why a large part of the so-called reduced social product remained untapped, etc.), and public expenditures increased significantly (increased social benefits due to deterioration of the economic situation in the country, economic and war support to the insurgent Serbian people in BiH and Croatia, launching the Bosnian and Croatian wars of independence, refugee assistance, etc.).

The budget deficit was largely financed from the primary issue, and this monetization of the budget deficit 19 is the main causation of hyperinflation. Accordingly, the main measures of Avramović's program were primarily related to the monetary and fiscal sphere, and it can be concluded that this was an orthodox stabilization program. The stabilization program should, above all, accomplish: – breaking the hyperinflation and returning the lost money function to the dinar, – to enable fast and stable economic growth, – a significant increase in wages (drastically depreciated during the period of hyperinflation) and ensuring the minimum safety of all citizens, – essential reform of the economic system, especially in the financial sphere, and accelerating the transition process, etc. At the same time, it was necessary (first of all, the cost of political factors in the country) as soon as possible to create conditions for the abolition of international sanctions and the opening of the economy abroad, without which the Program can not be fully implemented. Since it was clear that one can not wait for the abolition of international economic sanctions, in order to join the breakdown of devastating hyperinflation, it was decided to start developing and implementing a stabilization program that should be realized in two phases[8]

The first, short-term phase envisaged monetary reconstruction and anti-inflationary measures aimed at breaking down hyperinflation. It was supposed to be realized in the first 6 months with its own forces, even under conditions of economic sanctions by the international community. The second, long-term phase envisioned essential economic reforms that (while preserving the stability achieved in the first phase) would lead to the economic recovery of the country, which would ensure long-term stable economic growth with an optimal employment rate and the growth of citizens' standards. This phase, as the authors of the Program have pointed out, assumed the abolition of economic sanctions and the flow of "fresh" capital needed for its realization. Since this assumption was not achieved, this second phase had no chance of significant success, as was the case with the first phase of the Program. Therefore, we will only keep in detail at the first stage of the Avramović program, because the implementation of the second phase did not occur, as international economic sanctions have not been abolished in the meantime. The first phase of the Monetary Reconstruction Program was realized under conditions of economic sanctions, without aid and any capital inflows, with initial foreign exchange reserves amounting to about 300 million German marks.[8]

It can be said that in the framework of the Monetary Reconstruction Program the basic measures were focused on monetary policy and monetary reforms, and fiscal policy. Life in the country after the implementation of the stabilization program began to slowly return to normal. However, it is also important to point out that in these two years, thanks to the gray money issue, according to the estimates of economists from that period, 4.7 billion DEM from the citizens were bought.

The National Bank of Yugoslavia issued 33 banknotes during the stated hyperinflation period, of which 24 were issued in 1993. Yugoslav hyperinflation lasted for 24 months, which is longer than the German crisis after World War I, which lasted 16 months, the Greek crisis, which lasted 13 months, and the Hungarian crisis, which lasted 12 months.[8]


  1. Bogetic, Zeljko; Petrovic, Pavle; Vujosevic, Zorica (1999-02-01). "The Yugoslav Hyperinflation of 1992-1994: Causes, Dynamics, and Money Supply Process". Journal of Comparative Economics 27: 335–353. 
  2. "Yugoslavia: Montenegro Adopts German Mark As Currency -- But With Risks" (in en). 
  3. "inflo, inflas, inflare A, inflavi, inflatum - Latin is Simple Online Dictionary" (in en). 
  4. Leendertz, Ariane (2016), "Geschichte des Max-Planck-Instituts zur Erforschung der Lebensbedingungen der wissenschaftlich-technischen Welt in Starnberg (MPIL) und des Max-Planck-Instituts für Gesellschaftsforschung in Köln (MPIfG)", Handbuch Geschichte der deutschsprachigen Soziologie, Springer Fachmedien Wiesbaden, pp. 1–13, doi:10.1007/978-3-658-07998-7_58-1, ISBN 9783658079987 
  5. "Inflation In The Confederacy". 
  6. Burton, John (1972), "Theories of Inflation", Wage Inflation, Macmillan Education UK, pp. 15–20, doi:10.1007/978-1-349-01407-1_3, ISBN 9780333133422, 
  7. 7.0 7.1 7.2 Asia, Steve H. Hanke This article appeared in the May 2007 issue of Globe (2007-05-07). "The World's Greatest Unreported Hyperinflation". 
  8. 8.0 8.1 8.2 Petrović, Pavle; Bogetić, Željko; Vujošević, Zorica (1999). "The Yugoslav Hyperinflation of 1992–1994: Causes, Dynamics, and Money Supply Process". Journal of Comparative Economics 27 (2): 335–353. doi:10.1006/jcec.1999.1577. 

Further reading