20 years of KM peg to the euro

On this day, 11 October, 20 years ago, the official foreign exchange rate has been determined, according to which1 KM=0.51129 EUR, i.e. 1 EUR=1.95583 KM. The official exchange rate of KM to EUR was agreed upon by the CBBH Governing Board on that day, defining the provisions of the Draft Law on Amendments and Supplements of the Law on the Central Bank of Bosnia and Herzegovina. The mentioned official foreign exchange rate was defined according to the official exchange rate for the conversion of Deutsche mark (DEM) in relation to euro, as defined by the Council of the European Union.

It is known that the CBBH is organised by the currency board model, which, in practice, is a very simple rule meaning that anyone who wishes to have the local currency – convertible mark (KM) has to purchase it for foreign convertible currency. As KM is tied to the “peg” currency, euro, the purchase of KM is carried out at the fixed exchange rate, which has contributed to the implementation of monetary policy objectives all these years through: 

• Preserving monetary stability,

• Preserving financial stability,

• Low inflation,

• Increase of household savings, expressed by constant deposit growth,

• Creation of environment for foreign investments,

• Growth of foreign exchange reserves,

• Support to economic growth,

• Timely servicing of foreign debt.

Therefore, for the Currency Board to function, foreign exchange reserves must be sufficient to enable all those who own KM banknotes and coins, including bank funds in the CBBH reserve accounts and deposits of Central Bank depositors, to convert them into reserve currency. Simply put, each issued KM has coverage in foreign currency or, in the language of the profession, monetary liabilities must never be bigger than the foreign currency assets of the CBBH.

The full convertibility of the convertible mark has never been questioned, and the domestic public, relevant domestic and international institutions and investors have never questioned the fixed exchange rate of the KM against the anchor currency, which is the foundation of stability. In the economic program of the European Union for BH, the Currency Board was assessed as an anchor of stability, monetary, and thus financial, on which international financial institutions, international agencies for the assessment of sovereign credit rating, rely. Based on this stability, foreign investors also base their assessments on investment opportunities in BH.