Economic Management in a State of War

By: Sam Vaknin, Ph.D.

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Countries with a non-convertible currency and a developing economy more and more often face low intensity and prolonged guerilla warfare which leads to a gradually worsening economic situation.

Measures number 2C, 4, 6A, 6B, 7, 9, 11A, 11B below are applicable to such a situation.

Another scenario is a crisis in balance of payments. The country then often seeks trade relief under GATT or WTO rules and multilateral financial aid packages (such as the IMF's CCF).

These measures are then applicable:

1B-1H, 2A, 2B, 2C, 2D, 2E, 3, 4, 5, 6A, 6B, 6C, 6D, 7, 8, 9, 11C, 11D, 11E, 11F.

The last and worst scenario is an unmitigated, all out, state of war.

These measures would then apply:

1A-1H, 2A, 2B, 2C, 2D, 2E, 3, 4, 5, 6A, 6B, 6C, 6D, 6E, 7, 8, 9, 10, 11C, 11D, 11E, 11F, 12, 13.

1. Foreign Exchange Regime and Capital Controls

1A. The central bank can fix the exchange rate or establish a currency board
1B. A ceiling or quota is often placed on foreign exchange payments to non-residents
1C. Central bank approval is required for investments by residents abroad
1D. Approval is required for payments under guarantees or non-trade purposes
1E. Payments abroad can be effected from domestic accounts only
1F. Domestic credit facilities to non-resident firms, banks, brokers, etc. are disallowed
1G. Limitations are placed on cash and credit card travel allowances in foreign exchange
1H. Transfers between external accounts require approval of the central bank

2. Banking Regime

2A. Certain types of reserves of the banks with the central bank – for lending to import businesses, for instance - are increased
2B. Certain types of reserves of the banks with the central bank - for lending to export businesses, for instance – are  decreased
2C. Reporting of transactions by the banks to the central bank is tightened
2D. Deposit controls are introduced (including a ceiling on interest payments, and a prohibition, or encouragement, as the case may be, of foreign exchange indexation of savings and obligations)
2E. Controls, ceilings, and quotas on withdrawals in foreign exchange are introduced

3. Interest Rate Regime

Increases in Lombard and discount rates to offset speculation against the currency.

4. Export Revenues Regime

Reduce the period for repatriation of export proceeds.

5. Import Controls

Prohibition on import of luxury goods and non-commercial vehicles.
Increase customs tariffs and duties on all imports (and introduce countervailing measures under GATT/WTO rules).

6. Public Procurement Regime

6A. Ceiling budgeting (the imposition of ceilings on item expenditures and micromanagement of the accounts of the budget users)
6B. Positioning of Finance Ministry supervisors and co-signatories in all budget users
6C. Freezing of public procurement of non-essentials
6D. Freezing of public procurement of essentials
6E. Expropriation of logistical war materiel (for instance, cars)

7. Emergency Borrowing Facilities

IMF facilities under an arrangement
World Bank - emergency borrowing
Bilateral – USA
Bilateral – EU
Bilateral – Others
Rescheduling of foreign debt (Paris Club, London Club)

Donor Conferences

8. War Bonds (linked to foreign exchange or nominal)

War effort bonds – voluntary (firms with turnover above a certain amount are "encouraged" to purchase the bonds through tax incentives)
Patriot Bonds – compulsory (firms with turnover above a certain amounts are obligated to purchase the bonds and a percentage of all wages is paid with these bonds, or a fixed quota of bonds is purchased by each household according to the number of members of the household)
Deductions from salaries are used to purchase the bonds
Financial transactions tax is imposed to finance the war effort
Increases in VAT, excise, and other consumption taxes are introduced in order to finance the war effort

9. Budgeting

War budget items can be part of the current budget.
A separate, supplementary budget can cater to the financial needs of the war.
A War Fund can be established – separately managed and includes all the proceeds from war bonds, etc.

10. Emergency Regime

Freeze on wages
Freeze on hiring in public administration
Freeze on indexation of pensions and other state obligations
Freeze on public expenditures and public procurement
Freeze on interest payments
Freeze on repayment of internal debt

11. Strategic Reserves

11A. Decision on which goods are to be included in the strategic reserves (oil, food)
11B. Decision on the quantities of goods to be included in the strategic reserves
11C. Budgetary allocation for the purchase of the goods in the strategic reserves and their warehousing
11D. Preparation of warehouses
11E. Hiring a trading firm (not through a public tender)
11F. Discrete market purchases

12. Suspension of Laws

Suspension of tax reductions in existing laws
Suspension of Public Sector Reform
Suspension of liberalization of the foreign exchange regime

13. Rationing and Subsidies

Rationing of essential goods (oil, food)
Food subsidies to the needy
Fight against criminal and black market (war profiteering) activities

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The author's name and a link to this Website must be incorporated in any reproduction of the material for any use and by any means.

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