This is an unprecedented crisis, thus it is difficult to predict the result

Interview of Governor Senad Softić for magazine "Start"

The Coronavirus pandemic, which completely unexpectedly affected the whole world, has already caused not only a health crisis, but also an economic crisis. Many economic experts claim that this will be the biggest crisis since World War II. The economic consequences are already being felt in Bosnia and Herzegovina. The Central Bank of BH has also been in the public spotlight in recent days. More specifically, the member of the Presidency of BH, Milorad Dodik, has been asking, for a long time, to halve the rate of required reserves. According to him, this would provide KM 2.5 billion for the economy and citizens via the Central Bank of BH. We talked about this initiative and other economic challenges ahead of us with the Governor of the Central Bank of BH, Senad Softić, Ph.D.

What are the most important tasks of the CBBH at this time of crisis?

The CBBH is focused on its key role, which is to preserve monetary stability in these turbulent circumstances at domestic and international financial markets. Therefore, adequate management of the CBBH's foreign exchange reserves, with an emphasis on investment security, is extremely important to us, due to the currency board arrangement. In that sense, the integrity of the domestic currency (KM) is stable, and thus the CBBH best contributes to the stability of the banking and financial system, as well as macroeconomic stability in the country.

The Central Bank regularly supplies commercial banks with cash in accordance with the requirements, and at the same time, commercial banks also have significant amounts of cash with them, so that everything works in the best possible order. Our citizens are aware of all these facts, and they behave completely rationally in terms of cash demand. At the same time, the use of other forms of payment is noticeable.

In addition, in these extraordinary circumstances, our priorities are to ensure completely smooth functioning of interbank settlements in the payment system.

In its efforts to ensure the continuity of the most important functions and tasks, the CBBH, at the same time, did its best to protect the health of its employees, maximally.

For long time, BH Presidency Member Milorad Dodik has been asking for the required reserve rate to be halved to five percent. According to him, this would provide KM 2.5 billion for the economy and citizens through the Central Bank of BH. I would ask you first to comment on this request, and after that, I would ask you to clarify what kind and whose money it is and how these funds could help the economy and citizens? I ask you this because the citizens perceive the famous KM 2.5 billion as saved state money which is "trapped" in a vault, but is that exactly the case?

On the liabilities side of the CBBH there is a reserves’ account. These are funds held by commercial banks with the CBBH. Part of the funds was created by applying the reserve requirement regulation, which currently amount to 10% on all liabilities of commercial banks. Banks with the CBBH may also hold funds above the required minimum, also called the excess reserves. In the second decade of March 2020, the required reserves amount to KM 2.72 billion, while the excess reserves amount to KM 2.66 billion.

The funds on the reserves’ account are not the property of the Central Bank of BH, but of commercial banks and their depositors (businesses and citizens). Therefore, they can only be disposed of by commercial banks. Thus, these are the funds of commercial banks, there are no "captured" state funds.

From the above, the key message is: „Commercial banks are free to dispose of their funds. Reducing the required reserve rate only makes sense when the excess reserves or a larger part of them is used.“

Although the shock wave of the crisis hit BH in mid March, are there any anomalies or nervousness in the banking market, has there been an increased withdrawal of savings from the accounts of both citizens and the economy? Are foreign banks perhaps withdrawing funds to their home countries?

So far, we have not noticed a decrease in the base for calculating required reserves. This means that depositors do not withdraw funds from banks. Likewise, no irrational behaviour of citizens in terms of accumulating cash was observed.

What do you think is the biggest risk at the moment, what worries you the most as a Governor at the moment?

Uncertainty regarding the duration of the emergency situation and in that sense the effect on economic activity is currently, in addition to health, the biggest challenge that we face. For a longer period of time, we will not be able to fully comprehend the overall effects of the measures currently being considered and taken In any case, it is important to emphasize the need for all actions to be coordinated. In this way, we will ensure the maximum effect of the measures on economic activity and life standards.

Given that currently no one in the world knows how long this crisis will last, is the CBBH already developing some scenarios - from the worst to the least bad (since there is hardly anything good, at the moment)?

We should keep in mind that this is an unprecedented crisis, so it is difficult to predict the end result. Problems with the spread of the virus have become global, and we do not yet have any official information on the effects of the shock in BH, which is already evident. We are witnesses, and information appear in the media about the closure of certain activities, business with reduced capacity, layoffs, but we do not have any official statistics yet. Any assessment of losses at this stage, on my part, would be unfounded.