BH's foreign currency reserves amount to 7 billion euros

We could say that Senad Softić is the right man in the right place. He is a Ph.D. in economics and an associate professor at the Faculty of Economics, University of Sarajevo. He built a career in the banking world for years, and five years ago he was entrusted with the duty of the Governor of the Central Bank of BH, which he performs in the best way.

Mr. Softić, you received the Večernjak Seal Award for merits in public administration. What does this award mean to you?

Without false modesty, rewards are always flattering. Such is a human nature. It may sound like a phrase, but awards are the recognition of the past work, but also an obligation for the future. At the very beginning, I want to emphasize that I perceive this award primarily as a confirmation of the work of the entire Central Bank of BH (CBBH) in these times of crisis. Of course, I am glad to receive such recognition, because Večernjak seal, as a respectable award, is an additional confirmation that we are doing the right thing. I would say that it is also an affirmation of our direction towards improving the CBBH communication with the public. We want to be as transparent, as possible, in public and we use new forms of communication, which you can see on our website, too. This award will be an incentive for me that in my future work, my associates and I strive to be as professional as possible and to contribute even more to the well-being of BH and the citizens, through our work.

Unfortunately, we are witnessing that the Coronavirus is still not passing away. How and to what extent has the COVID-19 pandemic affected and is affecting the monetary stability of BH?

There is no doubt that the Coronavirus affected the entire economic situation in BH. The latest OECD projections from June say that the world economy will fall by about 6% this year. The induced coma, into which we have brought economies to fight the pandemic, has its high economic and social cost. Now we are slowly coming out of that condition, but it is still difficult to say what the scars will be on the economic fabric of BH by the end of the year. Preliminary projections show that the crisis has affected all parts of BH economy, and the decline in production could be around 5%. However, fortunately, the monetary policy we, pursue, is strictly adhering to the principles of the currency board. Therefore, regardless of the pandemic, economic crises and developments in some other countries, we guarantee monetary stability. I would add that so far there has been no need to change our policy. However, since the beginning of the crisis, we have repeatedly said clearly that, if the need arises, the Central Bank of BH is ready to reduce the rate of required reserves for banks. If we did that, we would increase the liquidity of the banking system. Nevertheless, all the indicators, we have, illustrate that liquidity is very high. Banks hold large surpluses above the required reserves, so, on our part, there is currently no need for changes.

Globally, how much does BH depend on the European Union and the stability of the euro, given that the convertible mark is pegged to the euro by the famous "Currency Board"?

As you said, the currency of BH, the convertible mark is legally pegged to the euro. The EU, or the euro area, is our main foreign trade partner. BH has approximately two-thirds of its foreign trade with the EU. In addition, a part of the trade outside the EU countries is carried out in euros. For example, Montenegro is unilaterally euroized, and Northern Macedonia has a currency pegged to the euro. Depending on how we measure (exports, imports, types of goods, etc.) between 35 and 50 percent of world trade is calculated in euros. Therefore, the EU and the euro are very important for us not only in foreign trade, but also in overall balance of payments relations. The balance of payments covers all relations of a country with abroad, including tourism, transport, remittances and similar. By being pegged to the euro via our currency, we are actually eliminating one of the risks in business, and that is currency risk. This fact contributes positively to the economic activity. Investments do not like risks. Of course, in times of crisis, what is happening in the EU affects us, as well. Thus, according to some projections, the economy of the entire EU in 2020 could fall by about 10%. As I said, it must affect us, too. However, when the expected recovery takes place in 2021, it will have a positive effect on BH. But, as far as the stability of the euro itself is concerned, there is no need to worry. The euro is the world's second largest currency, thus, being widely accepted around the world.

Do you think that the citizens of BH have reason to worry about possible exchange rate instability and earthquakes in foreign markets?

Our citizens have no reason to worry about exchange rate stability. It is the principle of the currency board, which we strictly respect, that guarantees the stability of the KM exchange rate. Our foreign currency reserves are over KM 13 billion, which is almost seven billion euros. As we say, we have full coverage of monetary liabilities (cash and deposits with the CBBH) in euros and additionally reserve funds above that. We guarantee at all times the convertibility / ability of exchange of KM for the euro and vice versa. We have been building trust in the currency board for more than two decades and I can say that the citizens of BH trust us. We have repeatedly emphasized that our currency is stable and remains pegged to the euro. Of course, as for the economic trends or stock markets trends in the EU and their impact on us, that is something else. As I have already explained, earthquakes in foreign markets have an impact on our economic trends. A significant decline in the economies, we trade with, certainly affects us, as well, but not the exchange rate stability.

Many economists point out that the banking sector is one of the strongest in BH. We are interested in how pleased you are with the cooperation with domestic commercial banks and how do you evaluate their work?

The Central Bank of BH has direct connections with commercial banks in only a few business segments. In accordance with the scope of work defined by the CBBH Law, banks are required to keep a certain level of funds at CBBH accounts based on required reserves, and then the CBBH converts EUR and KM at the request of banks without restrictions and performs cash transactions with commercial banks. Another important function is the maintenance of payment and settlement systems, whereby banks are required to have a sufficient amount of money on their accounts in the CBBH on a daily basis to cover interbank payment transactions in the country and abroad (international clearing). In addition, data in the registers of accounts and credits in the CBBH are generated from banks, and banks report to the CBBH on monetary developments for the purposes of keeping statistics in the CBBH. It can be assessed that within these activities, cooperation with individual banks functions flawlessly. Also, the cooperation of the CBBH with banks takes place through the Association of Banks in BH, with which dialogues are conducted on systemic issues with the aim of finding solutions for more efficient functioning of the banking system. This cooperation takes place through two key channels, the CBBH Coordination with the Entities’ Banking Agencies, which are responsible for the regulation and supervision of banks' operations, and the Standing Committee on Financial Stability. In general, the banking sector in BH is very well regulated, all banks, without exception, operate in accordance with regulations, and based on financial health indicators, it can be assessed that the banking system is stable, adequately capitalized, liquid and profitable. I say at the very start, that the banking sector in BH is highly capitalized, liquid and stable. We determine the amount of required reserves for banks, manage payment and accounting systems, manage the supply of cash and ensure constant convertibility of the euro for KM and vice versa. In addition, we regularly conduct stress tests of the banking system; publish an annual report on financial stability with a series of indicators on the financial health of the entire system. I am satisfied with the cooperation with commercial banks. We have open two-way communication and that is the main precondition for good cooperation. I would say that we cooperate well in all areas defined by the Law on the CBBH.

You have often pointed out that banks in BH are liquid and have enough funds to survive the crisis. Can these funds, instead of lying in the banks, be somehow directed to the development of society and the domestic economy, or does that also depend on politics?

Liquidity indicators are good and indicate that our banking sector is able to cover unforeseen costs that may arise due to the deterioration of the quality of the loan portfolio or the withdrawal of funds from their clients. Banks in BH are private corporations that operate on a commercial basis and, in accordance with their internal risk assessment procedures, make business decisions when it comes to approving placements to businesses and individuals. Our banks are capable, and I would dare say willing, to financially support eligible and good quality clients and their projects, and that is the basic way in which they can contribute to the development of the domestic economy. Politics, i.e. governments, certainly have the responsibility to create circumstances in which economic activities can be developed and strengthened. As for the role of politics, I would say that political stability is important for investment decisions. The recent confirmation of BH's credit rating is good and important news. I think that the best way the Central Bank of BH can contribute to banks to increase lending is to continue to maintain the stability of the exchange rate and the financial system, that is, to perform all our legal functions as efficiently and professionally as possible.

In addition to Sarajevo, the Central Bank has offices in Mostar. How satisfied are you with the work within the CB?

I am very satisfied with the work of all parts of the Central Bank of BH. According to the Law, the Central Bank in BH is organized through the Head Office, three Main Units and two Branches. The Head Office of the Central Bank of Bosnia and Herzegovina is in Sarajevo. The Main Units of the CBBH are: MU Sarajevo, GBRSCBBH Banja Luka and MU Mostar. There are two Branches in Brčko and Pale. The Main Unit Mostar, as well as other parts, excellently performs its functions prescribed by the Law and internal regulations of the CBBH. However, also, I must say that we are constantly trying to increase the efficiency of our work, implement reorganizations and follow the modern trends of the organization in the rapidly changing central banking. As organizing and managing change is a professional interest in my academic life, I know that there is always room for improvement and we will continue to work on it.

What are your greatest achievements, are you satisfied with what you have achieved?

Honestly, if I were to describe in detail what we are doing and changing in the CBBH, I would probably take up too much space for you. On the receiving the Večernjak seal, I said that our business is marked by two words: improvement and stability. Here I single out only the most important things, and those are: improving the quality of economic research and working on financial stability. Namely, we have been working for a long time to raise the quality of some of our main functions. I mean research and work on financial stability. We have already done a lot in research. This year we are planning the third international scientific conference. We introduced for the first time the so-called CBBH working papers. We plan to publish our macroeconomic projections to the public for the first time very soon. We are also working on a report on macroeconomic imbalances. In EU countries, this is a normal procedure within the so-called European Semester and the harmonization of macroeconomic policies with the European Commission. So far, these reports are internal ones, but they are also our step towards EU alignment. In terms of financial stability, we have improved our work on stress tests, and in the Report we publish a number of interesting indicators such as: macro financial risk diagram, interbank exposure network, contagion index, vulnerability index, etc. We are also introducing a lot of innovations in the distribution of cash that it is based on the most modern principles that are in line with EU regulations and take into account the quality of banknotes and especially counterfeits. We also worked on harmonizing the regulations on required reserves for banks against the euro. As we, as a currency board, are tied to the euro, it is necessary to monitor what is happening in the euro area, that is, to change our interest rate policy according to the changes brought by the European Central Bank. This also refers to the improvement of the Central Credit Register and the expansion and improvement of the single register of business accounts. At the Central Bank of BH, we believe that our work on the Single Register of Accounts, as well as on the Credit Register, is a significant contribution to greater transparency, and thus the stability of the entire system. We have also significantly modernized communications with the public and introduced new communication channels. The way of communication has changed a lot all over the world, including in central banking. What only a decade ago was either unknown or unthinkable in the way it communicates with the public, today central banks use it regularly. So it is my pleasure to say that you can follow us recently on Facebook, LinkedIn, we have our YouTube channel, Twitter account, we have upgraded our website, where we regularly publish speeches and interviews. We also have a sub site dedicated to financial education and inclusion of BH citizens. In few words, our major changes in communication follow the trends of the most modern central banks in the world.

In short, it could be concluded that the Central Bank of BH is keeping pace with the times in order to be even more functional and efficient.

We are constantly improving the organization of work to be in line with modern principles of central banking. We reorganized some basic functions, introduced new committees to better coordinate the work of certain parts of the CBBH and much more. In short, we are constantly working to improve our work.

Your term at the helm of the CB expires next year. Do you have a desire to remain at the head of the CB for another term?

It is a great honour and challenge for me to be a Governor. It is a huge professional and human experience. I have tried and will continue to do so in the best possible way. I am the Governor at a time of great global economic crisis caused by the Coronavirus pandemic and that is certainly an additional challenge. I came to the position of Governor from the academic community, where I spent almost my entire working life. I am still an associate professor at the Faculty of Economics in Sarajevo. And with numerous responsibilities as Governor, I partly maintain my activities at the Faculty of Economics and that makes me happy. As I teach crisis management at the Faculty, I try to connect theoretical and practical knowledge in my current work. I am satisfied with what has been done so far. But our economies and central banking are in dynamic change everywhere in the world, thus, there is work to do and there will be work to do in future. That is why we all must constantly monitor and adapt to change and make additional efforts to find the best solutions for all of us.