We Will Carefully Monitor Developments and Possible Changes

The Central Bank of BH does not expect major challenges related to the introduction of the euro in Croatia, said the Governor of the Central Bank of BH Senad Softić in a written answer to our questions.

He said that the foreign exchange risk in transactions with Croatia will remain insignificant, as long as the Currency Board regime is in force in BH, or until BH introduces the euro.

How much will the adoption of the euro in Croatia, sooner or later, have an impact on Bosnia and Herzegovina, given the border connections and the turnover that still exists?

We do not expect major challenges regarding the introduction of the euro in Croatia. On the contrary. The exchange rate regime in force in Croatia is a managed fluctuating exchange rate. The fact that Croatia is in ERM II means, among other things, that the CNB has successfully maintained the exchange rate of the kuna against the euro in a certain narrow spread. Therefore, fluctuations in the exchange rate of the kuna against the euro, and consequently against the KM, were not strong. This means that foreign exchange risk in the financial system and the real sector, from this aspect, was not emphasized. With the introduction of the euro, foreign exchange risk in transactions with Croatia will become negligible, as long as the Currency Board regime is in place in BH, or until BH introduces the euro. Therefore, when Croatia introduces the euro, the risks of doing business with Croatia will be lower because the foreign exchange risk of changes in the value of the kuna against the euro will be eliminated. Also, exchange operations (currency exchange operations) will be simpler because the same money will be used in 17 other countries. It is possible that in the medium term, the Croatian economy will become more integrated and turn to countries that have the euro. But I repeat, there should be no major challenges. The CBBH will monitor the developments very carefully and take measures in time, if necessary.

Can there be greater euroization in BH as a consequence of the replacement of the kuna with the euro?

Euroization (or dollarization) occurs when a foreign currency is not an official, basic currency in domestic payments, but is the choice of a significant part of households or corporates to preserve the value of assets, primarily deposits and savings, it is used as a unit of account, or a significant part of payments is performed in foreign currency. In BH, based on the Law on Foreign Exchange Operations and the Law on Internal Payment Operations, the only legal tender of payment is KM. In recent years, we have even recorded an intensification of the growing trend of deposits in KM, while it should be noted that the largest part of foreign currency deposits is in euros. To illustrate, according to the CBBH data, in May this year, deposits in KM amounted to 55.4% of total deposits. Deposits in foreign currencies, except for euros, accounted for only 4.3% of total deposits in the banking system. I would say that the introduction of the euro in Croatia will not have a greater impact on euroization in BH, especially not on its growth. The degree of euroization in a country primarily depends on confidence in its own currency and historical background.

Will Croatia's changeover to the euro require any steps that the Central Bank of BH will need to take?

The introduction of the euro in Croatia will not have an impact on operations in the CBBH. But of course, we at the CBBH will continue to regularly and carefully monitor all developments and possible changes and, if necessary, adjust accordingly.

In BH, certain institutions, primarily banks, requested to allow cash payments in euros in the country. Is this possible before BH takes the steps of Croatia and officially enters the euro area, which is a rather distant future from the current perspective?

We are not familiar with the initiative of banks to re-enable euro cash payments in BH. In the CBBH, we see no reason to reintroduce foreign currencies into cash payments in the country. On the other hand, the reasons against this are numerous, and by no means trivial. With the Entities' Laws on Foreign Exchange Operations, KM became the only legal tender in BH, ten years ago. A certain level of euroization is always present in BH due to the Currency Board arrangement. However, regulations that strictly restrict payments in foreign currencies in the country significantly limit euroization, thus enhancing the effectiveness of monetary policy measures and not losing seniority revenues. In addition, the prohibition on cash payments in foreign currencies has formalized a significant part of transactions from the unregistered and grey economy, which has reduced tax evasion and made money laundering and terrorist financing significantly more difficult. We have no indication that foreigners coming to BH have problems exchanging the world's leading currencies in BH in banks or exchange offices, or that they have difficulty withdrawing cash at ATMs or paying for transactions through POS terminals in BH through major brand cards issued outside BH. According to the CBBH data, from 2011 to 2019, the turnover on credit cards in BH, which were issued abroad, tripled to the level of KM 2.54 billion. Similar trends have been observed in the use of cards issued in BH for payments and cash withdrawals in the country and abroad. Therefore, we see neither the need, nor the reasons to allow payment in foreign currencies in BH.