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SECOND BUSINESS ROUNDTABLE WITH THE GOVERNMENTS OF BOSNIA AND HERZEGOVINA

SECOND BUSINESS ROUNDTABLE WITH THE GOVERNMENTS OF BOSNIA AND HERZEGOVINA. Sarajevo, September 22-23. PETER NICHOLL GOVERNOR CENTRAL BANK OF BOSNIA AND HERZEGOVINA. THE CENTRAL BANK OF BH (CBBH). Commenced its operations on 11 August, 1997 A state-level institution

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SECOND BUSINESS ROUNDTABLE WITH THE GOVERNMENTS OF BOSNIA AND HERZEGOVINA

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  1. SECOND BUSINESS ROUNDTABLE WITH THE GOVERNMENTS OF BOSNIA AND HERZEGOVINA Sarajevo, September 22-23 PETER NICHOLL GOVERNOR CENTRAL BANK OF BOSNIA AND HERZEGOVINA

  2. THE CENTRAL BANK OF BH (CBBH) • Commenced its operations on 11 August, 1997 • A state-level institution • Operates under its own Law • An independent institution • Its strategic direction is set by a Governing Board • It has five offices: • Three Main Units – Banja Luka, Mostar and Sarajevo • Two branch offices – Brčko and Pale

  3. MONETARY POLICY • The most important function of CBBH • The CBBH operates monetary policy through a Currency Board arrangement • Choice of a Currency Board: • It Provides a firm nominal anchor in the form of a fixed exchange rate. • It removed discretion in a situation where there was considerable difficulty in establishing institutions and making political decisions. • Works well in some other Eastern European Countries

  4. THE CURRENCY BOARD • The fixed exchange rate is specified in the CBBH Law • Full foreign exchange backing for all the KM liabilities of the Central Bank • Full convertibility of the CBBH’s KM liabilities into the anchor currency

  5. THE FIXED EXCHANGE RATE • The fixed exchange rate is 1KM = 0.51129 euro. • Initial exchange rate was 1 KM = 1 DEM • The KM exchange rate has been unchanged since the CBBH commenced its operations in 1997 • Transition from the DEM to the euro as the anchor currency went smoothly

  6. CBBH FOREIGN RESERVES (end of period – in KM millions)

  7. FULL CONVERTIBILITY • The table shows that the KM has been a convertible currency within BH

  8. SUCCESS OF THE CURRENCY BOARD • The Currency Board has been a very successful type of monetary policy for BH • The KM has been a stable currency against the DEM and the euro since it was introduced. • Inflation in BH is low and stable. • KM use has risen steadily and the KM is the dominant transactions currency in all parts of the country.

  9. INFLATION IN BH (Retail price index, Annual % growth)

  10. FOREIGN DIRECT INVESTMENT (in KM millions)

  11. THE CURRENCY BOARD WILL CONTINUE • Decision of the BH Presidency that the Currency Board will continue • The Currency Board produced major economic and social benefits • Long term goal –take BH economy closer and into Europe

  12. NEW GOVERNING BOARD • New CBBH Board appointed from 11 August, 2003 • Governor Nicholl reappointed until 31 December, 2004 • Vice Governor Kemal Kozarić will become Governor on 1 January, 2005 • Decisions by the BH Presidency were: • taken early, thus avoiding uncertainty • provide a high degree of continuity • look well ahead, thus assisting the smooth transition to a new Governor in 2005

  13. REQUIRED RESERVES (RR) • RR is the only instrument of monetary policy available to the Central Bank of BH, under the Currency Board Arrangement • Goals: • Efficiency and flexibility • Harmonization • Financial stability • Features: • Applied to all deposits (KM & foreign currencies) • 5% (CBBH Law permits ratio to be set by the CBBH Governing Board between 0% and 20%) • Reserve deposits at CBBH are remunerated

  14. CHANGES IN THE BANKING SECTOR • Reform of the payment system • Significant increases in a banks’ minimum capital requirements • Inter-entity banking • Deposit insurance • Arrival of foreign banks • Privatization of government owned banks

  15. CAPITAL STRUCTURE IN BH BANKING SECTOR (in %) * The data is not available, but the % of ownership would have been low

  16. THE BANKING SECTOR • An improving banking sector • Return of confidence • Return of depositors • Lending on more reasonable terms • Real competition • High level of foreign investments • Obstacles • High banking risks

  17. FUTURE INITIATIVES IN THE BH FINANCIAL SECTOR • National Capital Markets Council (NCMC) • Sovereign credit rating • Securities market • Stock exchanges • Banking supervision • Harmonization with the EU standards and regulations

  18. THE ECONOMIC OUTLOOK • Economic outlook hard to predict • BH going through several transitions simultaneously • Regulatory, tax and legal systems need to be changed • Improving, but still too complicated, environment for private investment • Stable macroeconomic situation • 6% to 7% expected economic growth rate per annum • For investment in BH, the balance between opportunity and risk now favors opportunity

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