Will the economy survive the pandemic?

Statement of the Governor of the CBBH to Business Magazine

Had it not been for the Konjic incident, it could be stated that Bosnia and Herzegovina is currently coping quite well in the economic terms, as well as, the health care wise, with the challenges brought by the Coronavirus.

The current Coronavirus pandemic, as well as all similar plagues, in addition to direct consequences on human lives and health, brings with it a number of side effects, including a slowdown in business activity, which, as experts agree, will inevitably result in a new global recession, that is too early to be estimated, but it will undoubtedly be a record one.

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF) summed up in one sentence all the facts and dilemmas about the economic consequences of the pandemic: "The prospects for global growth in 2020 are negative - a recession, just as bad as during the global financial crisis or worse."

What can the weak economy of Bosnia and Herzegovina expect in such circumstances? Will and how will it survive the battle against the Coronavirus?

VISIBLE CONSEQUENCES

"Unfortunately, the consequences are already visible. Closing up everything except the grocery stores, restricting the movement of people and goods, are already leaving effects. How far these effects will reach depends on two parameters - how long this will last and what are the next steps to combat the crisis? Unfortunately, no one has an answer to these two questions, and to make any projections at these times is not wise. In the case of BH, there are several primary channels through which the macroeconomic shock, caused by the uncontrolled spread of the virus, will spill over on BH. Primarily, there is an expected reduction in the volume of industrial production (which is already under pressure due to slow economic growth in Germany and Italy), issues in the functioning of strategic companies in BH, but also trade barriers in the environment. Revenues from services provided in the balance of payments will also decrease, and the surplus on the services account will cover part of BH's foreign trade deficit. This primarily refers to services related to tourism, but also transport services and manufacturing goods. Finally, the functioning of the company will be hampered by the reduction of foreign demand for our goods.

„The second round of effects, which primarily refers to the connections between the financial system and the real sector, will depend on the strength of the first shock and its duration," Senad Softić, Governor of the Central Bank of Bosnia and Herzegovina, told for our magazine.

Judging by the reactions of domestic businessmen and state institutions responsible for economic issues so far, the consequences of the pandemic could be even better amortized than in many far more developed and politically organized European countries. Among the most important intervention measures is the fact that, despite the complex state system and sluggish administrative apparatus, a conditional moratorium on repayment of loans of natural persons and legal entities was introduced in a very short time, which significantly increases the space for manoeuvre to domestic financially endangered artisans and businesspersons, in order to maintain the continuity of the business process, even in a significantly reduced volume, and settle the obligations to employees.

"As a result of previous regulatory activities and actions of banks, adequate capitalization and liquidity are maintained at the level of the banking system. Currently, the system is adequately capitalized, liquid and secure. In the new circumstances, appreciating the current regulatory framework and the state of the system, banks have a number of possible measures at their disposal and sufficient flexibility to implement them. The possibility of such crises was taken into account in regulatory requirements, stress testing and activity planning. It is important that the assessment of the necessary measures and activities take into account current and long-term effects, which include effective recovery after the crisis.

„The actions of the FBH Banking Agency will be harmonized according to the available information and analyses. Also, special attention will be paid to the analysis and possible implementation of measures implemented within the European Union, based on the recommendations of the European Banking Supervision Agency (EBA) and the European Central Bank (ECB). In the coming period, we expect dynamic coordination and consideration of possible measures at the level of the system, relevant institutions and the business community, "the FBH Banking Agency said in a statement for Business Magazine.

Among other things, entity development banks have been activated in BH, useless, so far, for most of the domestic business community, whose funds should be directed into funds for economic stabilization, which, in addition to delaying the payment of taxes and para fiscal levies, should be sufficient in principle to repel the second wave of problems, caused by the pandemic, after the first wave, by establishing relatively stable supply chains, was overcome quite painlessly.

"We will know the scale of the economic consequences of the pandemic, in the coming months, which will certainly happen.

To keep them to a minimum, the BH Chamber of Commerce has sent a number of initiatives to the BH Council of Ministers, many of which have been accepted and implemented, starting with solving problems with the transport of goods, so that our supply chains do not stop, which we have made a number one priority. The next priority we focused on was that our exporters could continue to place their goods on foreign markets, which also works, though slowly.

Finally, we proposed to form a list of companies of vital interest in BH, and to collect all relevant data, especially on raw materials that our companies lack, we posted a survey on our website, which was answered by several hundred companies and based on these analyses sought benefits for certain materials. For now, we have good communication with the competent government institutions and we hope that the state and the entities have enough strength and capacity to act in harmony and prescribe all necessary measures to overcome the situation, "said Vjekoslav Vuković, President of the BH Foreign Trade Chamber.

If in such circumstances one can speak of positive effects, at all, they can certainly be seen in the realization that BH, in all social segments, and especially in the economic sense, can and must rely primarily on its own capacities, but also on regional cooperation. Even before the pandemic took off, „the well-meaning" European Union stopped the flow of all strategic types of goods, including necessary medical equipment, not only to BH, but also to all other countries in the region that are still waiting for a Brussels invitation, telling us that "the EU is ready to help in the fight against Coronavirus, but at this moment it cannot provide help "?! The whole story of international solidarity in difficult times was reduced mainly to the closest neighbours, primarily Croatia and Serbia, which opened corridors for the smooth flow of goods, i.e. set aside part of their reserves in basic foodstuffs (flour) and medical materials and equipment for BH needs.

"When it comes to regional cooperation, first of all, we now see how much we are economically dependent on each other. I am proud of my colleagues from neighbouring, i.e. all countries of Southeast Europe. "Everyone is at our disposal, thanks to our communication channels, we have put everything on its feet and exchanged all information in real time in order to remove all obstacles to the continuation of production in our companies as soon as possible, so that workers are not fired," Vuković points out. Of course, as always in crises, all the chaff that gathered for years have surfaced now in Bosnia and Herzegovina economy and society, as a whole.

In contrast to serious business people who, together with their employees and honest political executives who, as it turned out, still exist, tackled the pandemic and invested all their knowledge and energy in minimizing the economic damage caused by the coronavirus, an equal number of swindlers and politicians - manipulators who, being literally ready to trample on the dead, seek to take advantage of the situation to gain material or political benefit (preferably both). With a certain number of so-called businessmen, who at the same time when the term: Coronavirus came to life in Bosnia and Herzegovina speech, began to lament that they are suffering astronomical losses and that they must suspend production and lay off workers if the state does not attach them to the budget, there are also loan sharks, who are trying to take advantage of the situation.

The most drastic example of this kind was the meeting of Republika Srpska political leaders with representatives of banks registered in the Entity, after which Milorad Dodik, a member of the BH Presidency, pointed out the idea of ​​reducing the rate of required reserve deposited by commercial banks at the Central Bank of BH, as one of the agreed draft measures for mitigating the economic consequences. Although the Central Bank reacted promptly and explained that there is absolutely no need for such a thing for now, because its accounts "currently contain 5.5 billion convertible marks deposited by commercial banks and their depositors, of which 2.7 billion KM are required reserves, while KM 2.8 billion represents a surplus above the required reserves, which clearly indicates that the banking system in the country is liquid and that there is currently no need for further reduction of the required reserves rate. Dodik, who, during the crisis, transformed himself into a very cooperative politician and a rather serious statesman who even expresses human emotions, remained consistent in his unfounded pressure on the Central Bank, which was multiplied by some non-professional media, led by RTRS, which, in in line with its editorial policy, which, for decades now, has been consistently following the concept conceived in 1992, reached the peak of its stupidity with the construction that "the CBBH does not want to help the economy at any cost." From the opposite angle, but with the same amount of arrogance and ignorance, Dodik's initiative was used by some politicians on the other side of the inter-entity line, such as state parliamentarian Damir Arnaut, who tried to earn cheap political points by frightening uninformed people by reminding them that "by invading the monetary system of SFRY, Slobodan Milosević caused its disintegration "with the addition to this message that" in no case should Dodik's request to seize the Central Bank's reserves should be accepted. " Unfortunately, some economic experts did not succumb to the irresistible desire to promote themselves, even at the cost of damaging their own reputation, which is especially surprising in the case of Vjekoslav Domljan, who in his media statements completely missed the point, while referring to the American reduction of the reference interest rates to zero, said that "the CBBH should already have reduced required reserves rate" and that "Dodik is right to seek intervention." The Office of the International Monetary Fund (IMF) Resident Representative in BH also added to the general confusion regarding higher liquidity of commercial banks. Instead of explaining the Dodik's groundless request, they, in panic, warned that "according to the Currency Board, the CBBH funds - its foreign exchange reserves , must cover at least 100 percent of the domestic currency in circulation, thus ensuring a fixed exchange rate between the convertible mark and the euro. "

FINANCIAL STABILITY

"Any attempt to use the foreign exchange reserves of the Central Bank for fiscal purposes would disrupt the Currency Board, would pose a threat to financial stability and the risk of significant inflationary trends. Such attempts undermine the anchor of macroeconomic stability and should be avoided at all times, especially in crisis situations, "the IMF added fuel to the fire (while in some ways contradicting its own Headquarters, which said that it" welcomes the moves of major central banks to ease monetary policy "), which in the meantime has extinguished, because, I guess Dodik does not have it available in terms of possible intervention measures aimed at maintaining financial and economic stability of BH in extraordinary circumstances caused by the pandemic“ once again it was clarified the situation with required reserve of commercial banks in the CBBH statement for Business Magazine.

"The CBBH has at its disposal the possibility of reducing the required reserve rate, if the need arises, i.e. when there is a need for additional liquid assets in the system. At the moment, there is a significant surplus of funds on the reserve account of commercial banks above the required reserve, "Softić reiterated, noting that the CBBH " will ensure the smooth functioning of the payment system in the country and foreign trade, by supplying cash to all commercial banks in BH. " Characteristic of crisis situations, and especially given the misinformation placed by relevant experts and institutions, many citizens and businesses fear that in the event of an escalation of the pandemic and market disruptions that would follow, they could be temporarily or even permanently left without their cash deposits in commercial banks.

"As mentioned earlier, the CBBH has responsibly approached the work related to the adequate supply of cash to commercial banks in BH in conditions of increased demand. The CBBH has fulfilled all its obligations to commercial banks, and thus to citizens, and we are sure that this will be the case in the future as well. The same thing applies to the maintenance of payment systems. Therefore, as far as the CBBH and its role are concerned, citizens can be convinced that the CBBH will perform its task and that commercial banks will have enough cash to ensure uninterrupted payments and withdrawals at counters and ATMs and that payments between commercial banks will function normally. Also, we remind you that the Deposit Insurance Agency of BH guarantees up to KM 50,000 for deposits in accounts in commercial banks ", says Softić, related to this issue.

In summary, it could be stated that BH is currently coping relatively well with the Coronavirus pandemic in economic terms, similarly to the medical one. Unfortunately, this rather satisfactory picture was dramatically disturbed by the incident in Konjic, the consequences of which on the economy and citizens health will be felt in Bosnia and Herzegovina only in the coming weeks and months, but by which, the leading federal businessmen and various levels government officials recklessly gathering to celebrate the Igman anniversary in the midst of a pandemic, and then even more recklessly ignoring warnings of self-isolation, have spread the virus across the country and endangered the health and lives of thousands of their co-citizens, at the same time paralyzing the most vital part of domestic production, the dedicated industry. However, we hope that the consequences of this act will be milder than the worst scenarios predicted and that we will emerge from the crisis, both literally and economically, alive and as less as possible unharmed ...

Moratorium on loans

Taking into account the extraordinary circumstances caused by the Coronavirus pandemic, the entity banking agencies adopted decisions on temporary measures for the treatment of credit obligations of individuals and legal entities in banks, microcredit organizations and leasing companies.

"Banks and non-deposit financial institutions may grant clients special measures, such as a moratorium, i.e. a delay in loan repayment, which may last at least until the announcement of the termination of the emergency situation caused by the COVID 19 virus, the introduction of a grace six months period for repayment of principal, granting an additional amount of exposure for the purpose of overcoming its current liquidity difficulties and other measures aimed at facilitating the settlement of the client's credit obligations and maintaining the client's business.

For measures related to legal entities, decisions of banks and non-deposit financial institutions are expected based on available information and communication between the bank and the client.

When it comes to natural persons, banks and non-deposit financial institutions will act on the basis of their own assessment, documentation and information on the vulnerability of individual clients and groups of clients who have common characteristics (eg employees in one legal entity) ", reads the decision of the FBH Banking Agency , the content of which is essentially identical to the decision on temporary measures to mitigate the negative economic consequences of the pandemic adopted by the RS Banking Agency.

Tax breaks

In accordance with the recommendations of the entity Crisis Headquarters, the Tax Authorities of FBH and RS extended the deadlines for reporting and paying direct taxes.

"Given that the deadline for filing tax returns is March 31, 2020, the FBH Tax Administration informs taxpayers that the deadline for filing tax return forms is extended until April 15, 2020. These measures will be applied while the danger of the spread of Coronavirus lasts, "the FBH Tax Authority announced, while the taxpayers from RS went a step further, extending the deadline for submitting tax returns until the end of April.

"When it comes to entrepreneurs, the deadline is extended until April 30, 2020 for filing an annual income tax return for 2019, an annual tax return for a small business entrepreneur, that is filed only if in 2019 no monthly returns are filed for small business and / or in 2019 a tax of less than 600 KM was reported, as well as tax liabilities for the special republic tax for 2020.

Also, the deadline is extended until 30 April 2020 for filing tax returns for taxpayers - natural persons, who have the obligation to file annual income tax returns for 2019, as well as for holders of commercial and non-commercial family farms that file tax return forms, upon withholding tax for the annual calculation of contributions for 2019 ", it was decided by the RS Tax Authority.

Decisions on the postponement of the payment of current tax liabilities are still pending, as are the reliefs of the Indirect Taxation Authority of BH regarding the payment of value added tax and other duties within its competence.

Empty commodity reserves

A potential problem in the event of a prolongation of the crisis lies in the fact that BH has virtually no commodity reserves necessary to overcome market disturbances, such as this one caused by the Coronavirus.

Tončo Bavrka, director of the Commodity Reserves Directorate, obscures the fact that the warehouses of Federal Commodity Reserves are empty by explaining that "the state of commodity reserves is a state secret", while in Republika Srpska the situation is even worse, because in that entity commodity reserves have not existed institutionally wise....