Interview with Governor of the CBBH published in magazine „Stav“

The interview has been published on 9 April 2020.

Our Currency Is Stable and It Remains Pegged to Euro

„We have quite a sufficient amount of cash“, Governor of the Central Bank of BH, Senad Softić says in the exclusive interview for magazine „Stav“, but he also adds that we must not in any case endanger the financial sector stability by rash actions such as the usual suggestions in crises to abandon the currency board. Although the Central Bank does not have many monetary policy tools available, its most important role, as Softić has explained in the interview, is to ensure the confidence of citizens, economy and investors in convertible marka. At the moment, we do not lack confidence.

Always when there is a crisis, the Central Bank of Bosnia and Herzegovina is asked to "help". What are the tools available to the bank?

The Central Bank of Bosnia and Herzegovina (CBBH), according to BH Constitution, is the only institution of the state authorised to issue currency and implement monetary policy in entire Bosnia and Herzegovina. The role of the CBBH is very significant in economic respect, but also generally in society. Our main objective is to preserve the stability of the currency through the currency board. So, the maintenance of monetary stability. I would remind you that the currency board means the full coverage of monetary liabilities with foreign exchange reserves. The CBBH monetary liabilities, according to the CBBH Law, includes cash in circulation and domestic deposits of banks and other residents. In addition, according to Article 27 of the CBBH Law, it has been regulated that the amount of the initial capital and general reserves of the bank should be five per cents of the total amount of monetary liabilities. The local currency exchange rate has been fixed to euro as the „peg currency“. Our specific objectives are the efficient management of foreign exchange reserves, payment and settlement systems and the ensuring of continuous supply of cash. We perform all this in a professional and responsible way, thus contributing to stability in the best way. Regarding the tools which we have available, unlike some other central banks which we are often (mistakenly) compared with, we only have the possibility of regulating the required reserve rate, thus regulating also the banking system liquidity. We are completely forbidden to lend or carry out open market operations. Related to the required reserve rate, I need to stress that we monitor the banks' reserves trends regularly and carefully. If necessitated by the overall liquidity situation, we will reduce the rate and thus increase banks' liquidity. However, the current data do not show it to be needed.

Should we allow the endangering of the financial system stability due to rash decisions, unrealistic requests?

Of course not. Breaching the currency board would be not only illegal but also highly harmful for a long-term economic development of Bosnia and Herzegovina. I often quote the former German minister of economy and later finance, Karl Schiller: „Stability is not everything, but without stability, everything is nothing.“ That is the reason why we in the CBBH are very cautious not to disturb monetary stability in any way, which could have huge consequences on the entire financial system. Our neighbouring country Croatia has spent EUR 2.4 billion for foreign exchange interventions in order to avoid considerable weakening of its currency as they know well that a strong depreciation would bring about chaos in the country, with very hard consequences on economic entities. Our foreign exchange reserves are a guarantee of the currency board. The CBBH invests its foreign exchange reserves only in the highest quality securities of the European Monetary Union member countries and deposits with the best banks. The reason is that those funds are a guarantee of the currency board system.

Which is the situation we must not find ourselves in ?

Related to the Central Bank, we must do everything so that the confidence in the currency board is not diminished. We can do that only by adhering to the core principles of the currency board. It may sound like a phrase but it is the truth: Confidence is built for a long time, but it can be lost in a moment. So, for two entire decades, we have been building confidence in the currency board, and I can say that citizens of Bosnia and Herzegovina trust us. The confidence in the local currency is based on the trust of citizens, economic entities and potential investors that each banknote and coin which they have, at their request, will purchase the same quantity of euro as in the past, and that such ratio will not be changed in the future. Therefore, we must not bring ourselves into the situation to make this strong confidence which I thank you all for, disappear suddenly due to a rash and hasty decision.

Assuming that governments save companies in troubles by means of tax reliefs, payments of contributions etc..., and on the other hand, real wages decrease and purchasing power decrease, deflation is a possible scenario. How can we solve such challenges if we do not have the possibility to manipulate the currency exchange rate?

There is a number of countries which do not solve their economic imbalances by exchange rate changes, and they are very successful. Without details, there is extensive scientific literature saying that for small open economies, such as Bosnia and Herzegovina, exchange rate manipulation cannot bring about any benefits. I would also like to stress that exchange rate is not the only instrument of economic policy. Most economists agree that it is much better to use fiscal policy measures in situations where we are now. By that, I mean that the state can intervene through budget, i.e. by adjustments, decrease of taxes and contributions, but on the other hand, make maximum savings were spending is irrational, and such cases certainly exist. Also, economy can be stimulated through the increase of state investments, for example, in infrastructure or other forms of capital government spending. This could, to a certain extent, neutralise a part of the expected slowdown, even decline of economic activity due to the spill-over of shocks from foreign countries and the expected slowdown of domestic spending. I would also add structural policy measures. Some of numerous structural policy measures refer to making the labour market more flexible, to stimulate competition among companies, to create a better business environment by reducing bureaucratic obstacles, corruption and similar... There are also measures to stimulate innovation and creativity. There are plenty of such measures and they can contribute significantly to economic progress.

So, economic policy makers have a number of tools available which may be used to make this situation easier. The manipulation of the exchange rate in Bosnia and Herzegovina is neither possible nor could bring about economic benefits as some naively and hastily believe. We all need to be aware that, as you say, the exchange rate manipulation is actually a significant devaluation, weakening of KM exchange rate in relation to euro, which would not only be a negation of the currency board but would also bring about the growth of inflation, increase of distrust in banking system. Therefore, citizens would be converting their KM deposits into euro and withdraw their money from banks. This would be the beginning of the currency and banking crisis. Maybe some people have forgotten the consequences of the inflation and the collapse of the financial system of the former country, and a good example for the consequences of abandoning the currency board could be the Argentine. In January 2002, they had abondoned the fixed exchange rate, which was the beginning of chaos, a huge growth of poverty of citizens and large losses for all economic entities. The recovery from the shock took years.

As your field of interest is crisis management, what is your opinion of the management of this crisis which could not be predicted even in dreams?

This crisis has clearly come „from outside“ and no one could have predicted it. I do not mean only that it has been imported from foreign countries, but it has originated outside of the economy sphere- a virus pandemic. We should remember that the 2008 crisis came from the financial system, primarily in the USA, and then it spread to the entire world. This COVID-19 pandemic whose peak we still cannot even see, let alone its end, is an unprecedented global crisis. As it is a new virus, even epidemiologists do not know what its development will be like, what its virulence would be like, mortality rate, when we will have a vaccine, and most importantly, when the pandemic will stop. Therefore, the management of such crises is quite demanding. I think it is necessary to evaluate adequately the situation on daily basis and be flexible with regard to measures and adjust where possible. I can say with responsibility that the CBBH has done everything it could do and it follows up closely with the situation both from the view of internal organisation and „distance“ working in the CBBH where processes make it possible, and also prevention measures of health and hygiene protection, as well as ensuring the management of core functions, which I have already spoken about.

Are there sufficient funds in domestic sources which we could use to help economy and citizens? Where can we find that money?

Briefly, there are sufficient funds. According to the available data, excess reserves held by commercial banks at the end of the third ten day period in March 2020 amounted to KM 2.45 billion. On that day, in the required reserve accounts (the required holdings) banks were holding KM 2.7 billion. It is a high amount. I would remind that the task and the main role of commercial banks is to collect deposits and lend to economy and citizens, they are financial intermediaries. For a country such as Bosnia and Herzegovina, external funds are quite important, so I believe that additional efforts should also be invested in that respect.

Borrowing from the IMF is a realistic option, what are the conditions of the IMF?

Emergency loan of the IMF is, I would say, in front of the door. It is a so-called rapid financing instrument which has been recently introduced by the IMF for this very crisis. The conditions are much „easier“ compared to the standard IMF arrangements. I would not discuss the details as they would be announced soon. However, in addition to the IMF, I believe that other foreign sources of financing should be also found. So, BH Deposit Insurance Agency, and I am the chairman of the Agency Governing Board, per my function, is in intensive process of agreeing with the EBRD on lines of credit which will strengthen the stability of the financial system of Bosnia and Herzegovina.

For the needs of mitigating the economic consequences of the pandemic and recovery of our economy, it is necessary to examine all the other options, such as new arrangements, in addition to the current one, with the IMF, loans of the World Bank, lines of credit and donations of European institutions and similar. Foreign debt of public sector in BH is around 25 per cents of GDP, so we have possibilities for foreign borrowing without negative consequences.

What do you think are the best measures to save the economy? Should we follow what the other countries in the surrounding area are already doing or should we search for our own way?

The answer to your question is simple. It is not „either-or“ but it is „and“. Both. It is necessary to follow up with what others are doing, particularly the countries similar to ours, those being the countries in the surrounding area. I have said that this is unprecedented crisis, there are no prepared recipes for the optimal behaviour. Therefore, all of us, even the most developed ones, are „learning“ how to cope with it in the best way. That is way the experience of others is important for us. Yet, Bosnia and Herzegovina is a specific country with its constitutional arrangement and laws and its institutions. Therefore, we must not simply copy the experiences of other countries. We have to use our own knowledge which we have, and based on the experience of others, find the optimal solutions for Bosnia and Herzegovina.

However, we should not forget that entire economy has not suffered damages. There are companies still operating successfully, some of them even better than before the crisis. I would not like to advertise anyone specific, but we need to know that there are positive examples. No, it is the moment for each company to observe their internal reserves, accumulated profits, to increase its efficiency. The state is helping and will certainly continue to help to those that are in the worst situation, however, it is important for everyone to turn to themselves and use all the internal reserves. Both companies and citizens.

I am convinced that we have sufficient knowledge, and will, so that we can all together and in good faith find the solutions which will provide for all of us the exit from this crisis as early as possible and with as few losses as possible. I am particularly proud of everything that the CBBH has done by now, and the efforts which we all together are making to overcome the crisis, but we need to know that there is no magic wand to solve all the problems at once. Therefore, I believe that, with the basic human principle of solidarity in sharing the burden of the crisis, and respecting the experts and common sense, we will find the best solutions. I also believe that that we need to use this crisis to think about long-term future and accelerate reforms significantly. In the end I would like to quote Winston Churchill: „Never let a good crisis go to waste“. In other words, crises such as this one, once they have occurred, should be used for large changes, to make things better. That is a task for each one of us.