Interview of Governor Senad Softić to "Dnevni Avaz": BH will not run out of cash

BH will not run out of cash

The IMF predicts that the world economy could grow by 5.5 percent in 2021, but unevenly by country - In addition to external factors, the speed of recovery in BH in 2021 will depend on our reaction - If we implement key reforms, I believe that recovery would be faster, Softić says.

Senad Softić, the Governor of the Central Bank of BH, said in his interview to "Dnevni Avaz" that the coronavirus pandemic will not affect the monetary stability of Bosnia and Herzegovina, but also that our country, regardless of all financial shocks, will not run out of cash.

Citizens can sleep peacefully.

Softić said that foreign exchange reserves were also large and commented on whether BH would agree on a new arrangement with the International Monetary Fund (IMF), and why it was important for BH, as well as the reforms to follow, especially in these difficult health and economic times.

- I would like to repeat that in BH we have a currency board, whose rules the Central Bank of BH has strictly adhered to for more than two decades. It is precisely these rules of money production in the currency board with full coverage, as well as high foreign exchange reserves that are guarantees that we will maintain a high degree of monetary stability in the pandemic, as well. Citizens can sleep peacefully when it comes to monetary stability. Our convertible mark is stable and is firmly pegged to the euro - says Softić.

What can we expect in the coming years in terms of BH economy, because last year brought big economic crisis?

- On one hand, the BH economy performance is influenced by global trends, i.e. trends in the environment, and on the other hand, the condition and ability to implement reforms in BH. The world was evidently in the crisis last year. According to the latest information published on January 27, 2021, the IMF's estimates indicate a 3 percent fall in world GDP.

That is less than the projections made this fall. But still it is quite a lot. Recently, new types of the virus that are more contagious have appeared, as the issues with vaccine distribution. This has led to additional restrictions both within the largest European economies and in international turn over.

This suggests that the pandemic could last longer than predicted a few months ago. In addition, the IMF predicts that the world economy could grow 5.5 percent in 2021, but unevenly by country. Asia, especially China, will grow the fastest.

What consequences, but also scars can be left by the coronavirus pandemic in Bosnia and Herzegovina economy? What do economic analyses illustrate? When is the economy expected to recover?

It is difficult to fully see what kind of long-term scars Covid-19 will leave on the economy, but there will be the scars. Uncertainty is high and in such conditions it is difficult to give accurate projections.

We expect a 4.6 percent fall of the GDP for 2020, but we also expect growth in this 2021.

In addition to external factors, the speed of recovery in BH, in 2021 will depend on our reaction. By that I mean the necessary reforms that we need to implement, then, the domestic investment and the inflow of foreign funds.

If we were to implement key reforms, quickly accept external arrangements like the one with the IMF, I believe the recovery could be relatively quick, especially in the second half of 2021.

And when the recovery starts, I am sure that there will be increased optimism of all economic entities and that will encourage both domestic investments and personal consumption, and they are important components of GDP growth.

High liquidity

Can it happen, given that the fall in GDP is expected, that the financial stability of BH becomes endangered?

The BH financial sector consists mostly of commercial banks. According to all available indicators, the banking system is still very resilient to shocks.

As an indicator, I mention here that the so-called required capital rate is significantly higher than the prescribed 12 percent, which indicates that there are reserves in case the situation worsens.

Other important indicators of the banking sector are also good. The liquidity of the banking sector is very high. A healthy banking system is necessary to be able to finance a stronger recovery of BH economy. I would like to emphasize that the Central Bank regularly maintains coordination with both Banking Agencies; we are in contact with the Association of Banks and plan to regularly hold a Standing Committee for Financial Stability - SCFS, which includes the Ministries of Finance, too. All with the intention of better coordination in monitoring the financial stability of all important institutions.

Do you think that, taking into account all the difficulties, BH needs a new IMF loan in order to cope with the consequences of the pandemic more successfully?

We have already informed the public about it. The objectives of the programme and the loan are clear, and the need to have additional, low cost funds is an argument for the new arrangement with the IMF. These are the main reasons why I think so:

• The arrangement with the IMF would provide significant funds for us in the period ahead. They are, as I have said, quite needed.

• We have high costs of coping with coronavirus, and we have to decrease the negative consequences of lockdown and also we need the new arrangement for future investments and faster recovery.

• We are not speaking about the IMF funds only. Many other donors and lenders from international institutions often link their programmes with an active IMF programme.

• Besides, with the signed obligations in the arrangement with the IMF, we implement the needed reforms easier and faster. We all need them. Those are mainly the reforms which we should carry out ourselves, but it is often difficult to agree on them and the implementation is slow.

   

Which is the current amount of the foreign exchange reserves in the Central Bank and is it possible that we run out of cash?

Large stocks

• The foreign exchange reserves, according to the year end data, amount to KM 13.87 billion. This amount is higher by more than KM one billion compared to the end of 2019 and higher by more than two billion compared to the end of 2018. So, they are high.

  Regarding cash, the reply is clear and short – we cannot run out of cash. The reason is that, besides banknotes and coins in circulation, there are large stocks of cash in the vaults of the Central Bank and with commercial banks. Any demand can be met without any problems.  

What will happen with a new loan?

Do you believe that the new arrangement will take place and when do new negotiations can be expected?

• Honestly I do believe and it would be good to have the arrangement. I have stated firm reasons why I believe it is quite needed for entire BH. Regarding the time of new negotiations, it is difficult to say it precisely. Regarding BH, the IMF is now undertaking the so called regular consultations conducted with each member country under Article IV of the IMF Articles of Agreement.  

  I would say that the beginning of new negotiations depends both on the IMF and the completion of work on the report and also on our readiness to continue and conclude the negotiations.

The countries which have an IMF programme are perceived as more stable economies

Softić has told us that for a long period of time it has been spoken in the Central Bank about the need to expand the existing account registry to include the registry of accounts of natural persons, in order to complete the process of establishing a single registry which had been started a long time ago.

It is one of the issues in the Letter of Intent with the IMF. The Central Bank has all legal and technical preconditions to upgrade this registry which would significantly facilitate the work of all the participants in the financial sector, including BH citizens, and strengthen the country’s payment system. The registry of accounts of natural persons has a multiple significance for preventing illegal activities such as money laundering etc. Most importantly, the upgrade of the existing registry by the CBBH does not limit the keeping of the Entity registries in any way and it is not a transfer of authority. The countries which have an IMF programme are perceived as more stable economies, which decreases the risks and uncertainty which local and foreign investors face. Economic growth does not like risks. The IMF programme offers more security, or, in other words, it reduces risk. At international level, such programme is reflected in the country’s rating which is important for both official and private investments. Although significant private investments are not to be expected during the pandemic, everything needs to be done to provide as stable framework as possible for local and foreign investors once the pandemic ends –says Softić.

 „In crisis, budget deficits deteriorate as budget revenues decline, while expenses increase, particularly health system and social aid costs. The IMF funds will be also used for fiscal needs.“