„Nezavisne novine“ Interview with Governor: Corona cut foreign direct investments by half

The CBBH does not expect the growth of commercial banks’ interest rates on loans either for households or for legal entities

We are currently not in usual circumstances. The entire world is in the economic shock. Economists mainly agree that in such circumstances expansionary fiscal policy can contribute significantly to the mitigation of shock and faster recovery, said Senad Softić, Governor of the Central Bank of BH in the interview for „Nezavisne“ .

„Fiscal consolidation should be carried out in good times, but now, in the crisis, we need reasonable but additional government spending“, Softić has pointed out.

Could you comment briefly on 2020. What are the year end macroeconomic indicators like?

Data at the global level, i.e. the International Monetary Fund (IMF) projections, say that global economy could shrink by 4.4%, so we are in global recession. The only country which a growth is projected for is China. It is particularly important for Bosnia and Herzegovina that the euro area is expected to record a 7.3% decrease. This is important for us because it is our main foreign trade partner. On the other hand, the Central Bank of Bosnia and Herzegovina (CBBH) has recently published its forecasts for GDP of Bosnia and Herzegovina indicating a 4.6% GDP decline for 2020. The components affecting a GDP decline are decline of investments and exports, with the key component of GDP decline being personal spending, which is expected to go down by 5.3%.

What has been the coronavirus effect on finance, what are financial indicators like?

All the relevant indicators show a strong effect of the pandemic, and the resulting shrinking of economic activities. I will mention the example of one kind of statistics regularly compiled by the CBBH, covering the data on remittances from BH citizens living abroad. They account for around 8.5% of the total GDP, with the inflow in the first six months of this year amounting to KM 1.19 billion, which is lower by 17% than in the same period of the previous year. Although it is too early to speak about the data on foreign direct investment for 2020, some preliminary data for the first semi-annual period show an almost 50% decline compared to the same period of the previous year. The media have published the information of the Indirect Taxation Authority on a considerable decrease of indirect tax revenues. So, there is no economic indicator which has not been impacted by the pandemic.

You were speaking also in the past about the necessity of reforms. What is necessary for BH in order to function better financially and economically?

First of all, the crisis has shown the vulnerability of the global supply and production model. Due to a quite favourable geographic position, this country certainly can improve some segments of trade with the EU countries, and this is a good opportunity to develop local production more.

It is important to have in mind that the COVID related crisis will end, and we all need to prepare for the post-pandemic period. We need to start working systemically to remove obstacles for creating a better business environment.

The foreign exchange reserves in BH have been growing constantly, exceeding KM 12 billion during the last year, so what does it tell us?

The CBBH foreign exchange reserves are stable amounting to KM 13.66 billion on 24 December 2020. In current highly turbulent conditions in global financial markets, the CBBH is managing its foreign exchange reserves in the way which ensures liquidity and safety of the foreign exchange reserve portfolio. Investments are made in the first class securities of euro area member countries and deposits with central and commercial banks with the highest credit rating. It is important as foreign exchange reserves are a guarantee of the currency board system. So, anyone can exchange their KM for euro at any time they want to, which we guarantee. In order to be able to guarantee it, the CBBH must be sure it will be able to withdraw its assets (investments) completely (solvency) and on time (liquidity) when it needs them, i.e. when citizens want them. This has been the basis of the currency board and the entire BH financial system stability for more than two decades.

BH citizens are most interested in loans, i.e. interest, will they be increasing/decreasing and to which extent?

The CBBH does not expect commercial banks’ interest rates on loans for households or legal entities to increase. All the forecasts say that the leading central banks in the world will keep their, I have to say, very low interest rates for at least two years. There is plenty of money in international markets. Banks have available many sources of funds, at low cost. The liquidity of BH banking system is still very high, with banks keeping in their accounts the total of KM 5.8 billion, out of which, KM 2.7 billion is the amount which they have to keep due to required reserve, and the remaining amount, which is above 3 billion, are the so called excess reserves. Additionally, it is very important that demand for loans is very low. Both households and companies are quite cautious in their investments, because, I always point out, they are facing uncertainty. There is a large supply of money both in international and local markets, demand is low, so no serious economic reasons are perceived for raising interest rates.

BH has required the help of the IMF again, there is still no agreement of the Fiscal Council on the conditions from the Letter of Intent, do you expect this situation to be solved?

I honestly hope for a good outcome, for the simple reason that that the programme brings many positive things, in addition to the necessary funds. The first reason is off course, funding. BH needs additional funds, particularly foreign funds. In this year, we expect a decline of foreign remittances, a decline of exports and a decline of direct investments, which are anyway rather low in BH. It should be said that many donors and lenders from international institutions often link their programmes with an active, which means, approved IMF programme. Secondly, it is difficult for us to carry out the needed reforms by ourselves. We all need them. The IMF, in its programmes, asks us to carry out reforms. The IMF reminds us there is an obligation to implement reforms. Those are mainly reforms which we should implement ourselves, but often it is difficult for us to agree on them and then the implementation is slow. Thirdly, the countries with IMF programmes are considered to be more stable economies which decreases the risks and uncertainty which both local and foreign investors face. Economic growth does not like increased risks. IMF programme offers more safety, or in other words, it provides more safety to investors, so, it decreases risk. At international level, such programme impacts our rating. The rating is important for us not only for official but also private investments. Although significant private investments should not be expected during the pandemic, it is necessary to do everything to provide as stable environment as possible for local and foreign investors once the pandemic ends. In a crisis, budget deficits deteriorate as budget revenues decline and expenses increase, particularly the costs of health system and social care. The IMF funds will be also used for fiscal needs. Off course, it is a loan, and it will increase both public and foreign debt. We from the CBBH often argue against excessive borrowing, particularly irrational spending of budget funds. Every loan must be repaid. However, I repeat, currently we are not in usual circumstances. The entire world is in economic shock. Economists mainly agree that in such circumstances expansionary fiscal policy can significantly contribute to mitigation of shock and faster recovery. Fiscal consolidation needs to be carried out in good times, but now in crisis, we need reasonable but additional government spending. To sum up, it is quite clear that a new arrangement should be in the interest of all.  

How do you explain the fact that the CB, the only one in Europe and the region, did not react during the pandemic despite many requests of business people and politicians?

The institution which I represent should not get involved in discussions on the issues which are simply not in accordance with the mandate and the Law on the CBBH. This is not new for us. The pressures on the CBBH to undertake the activities contrary to its legal authorities have appeared for years at a certain dynamics. The most recent one took place in the beginning of the pandemic, where there were requests such as additional printing of money without coverage, budget financing and similar. Today, we certainly see that all the CBBH decisions were correct and justified. Such requests, beside being harmful for our society, mislead the public with respect to the mandate and authorities of the CBBH, which makes the damage multiple. Despite the statements saying contrary, the CBBH has done everything within its competence and within the applicable legal framework to preserve the functionality of segments of economy, and the society. Firstly, the stability of KM has been preserved, the currency board has been preserved as a guarantee of stability not only of currency but the entire financial system. All the time during the strongest crisis, all of our main functions were working smoothly - payment systems, including giro clearing system and real time gross settlement system, and also the Central Registry of Credits of Business Entities and Natural Persons in BH and Registry of Accounts of Business Entities, as well as supply of cash in the entire territory of the country. Some of these operations represented exceptional logistics and operational challenges in the conditions in which we work and live. Speaking of payment systems and registries, I would like to use the opportunity to stress that it is necessary to expand the existing registry of accounts so that it should include the registry of accounts of natural persons, in order to complete the process of establishing the single registry which had started a long time ago. It is one the issues in the Letter of Intent with the IMF. The CBBH has all legal and technical preconditions to upgrade this registry, which would significantly facilitate the work for all the participants in the financial sector, including the citizens of BH, and strengthen the country's payment system. Also, the registry of accounts of natural persons has multiple significance to prevent illegal activities of money laundering and terrorism financing. The upgrade of the existing registry by the CBBH does not restrict in any way the keeping of the Entity registries and it does not represent transfer of competences. The CBBH was also asked to decrease the required reserve rate. It is important to remind that those funds belong to banks and their depositors. We have stressed several times that, if it becomes necessary, we are ready to react promptly and increase banks' liquidity by lowering the required reserve rate. However, we do not see any need to do so at the moment, which is also shown by the data that I have mentioned earlier. I stress that in this situation, the CBBH has implemented a responsible and proactive policy according to the CBBH Law, and it will continue to undertake all the possible measures within its monetary regime in order to help economy and citizens. However, monetary policy cannot solve all the problems caused by the pandemic in society and economy. Our primary task is to guarantee stability and thus enable economic prosperity. Finally, let me wish a happy and successful New Year 2021 to your readers.

The banking sector has suffered some problems due to the pandemic, but it is still stable. Will it remain stable and liquid next year as well?

Banking sector in BH is very stable. As an indicator I would say that the regulatory capital rate is much higher that the defined 12 per cents, so there are reserves in case situation deteriorates. Other important indicators of banking sector are also very good. A sound banking system is necessary when a stronger recovery of BH economy starts.