Interview of Governor for magazine "Stav":Any attack on the Central Bank would be doomed to disaster

Central Bank of Bosnia and Herzegovina (CBBH) is a Central Bank of all citizens of this country, and this has been proven many times during last 25 years, according to the Governor. Considering the actual political situation in Bosnia and Herzegovina and attacks on key state institutions, in his interview to Stav, Softić emphasizes that no one interest is to demolish one of the most successful institutions, which by its performance gives the best contribution to the financial stability of the country.

STAV: All vital state institutions are under attacks of secessionist policy of Republika Srpska Entity, except the Central Bank, at least not publicly. Have there been any attempts of destabilization so far, or are you perhaps still expecting them? 

SOFTIĆ: The Central Bank is a constitutional category, and monetary policy is also, according to the Constitution, within the competence of the institutions of Bosnia and Herzegovina, i.e. exclusively the Central Bank, and in that sense we do not expect attempts to destabilize the CBBH. However, I must mention that, according to the latest report of the European Commission on the progress of candidate and potential candidate countries, the credibility and independence of the Central Bank is threatened by the process of appointing members of the CBBH Governing Board, which is the competence of the Presidency of Bosnia and Herzegovina. However, this did not affect the consciousness and behaviour of the most responsible people in the Central Bank of Bosnia and Herzegovina, thus the previous Governing Board continued its work in accordance with legal regulations so that functions and tasks would not be endangered. This ensured the continuity of the work of the Central Bank of Bosnia and Herzegovina until the election of a new Governing Board. I would also like to emphasize that we are the Central Bank of all citizens of Bosnia and Herzegovina and that this has been proven many times in the last 25 years. It cannot be anyone's interest to demolish one of the most successful institutions, whose work makes the best contribution to the country's financial stability. 

STAV: Naturally, the payment system, the financial system in general, is very much interwoven. Is there an option for, say, one Entity, in this case RS, to simply leave that system, make an alternative ...? 

SOFTIĆ: As I said, the Central Bank of Bosnia and Herzegovina is a constitutional category. The Law on the Central Bank, in Article 2, which defines the basic goals and tasks of the CBBH, explicitly states that one of its main goals is to support or establish and maintain adequate payment and accounting systems. Accordingly, we do not expect such a scenario because it would be contrary to the interests of the citizens of this country. There are legal regulations in this country, international obligations that Bosnia and Herzegovina has undertaken and which are expected to be fulfilled. We believe that such a scenario would be doomed. 

STAV: How much do you believe that the attacks on BH Indirect Taxation Authority are dangerous for macroeconomic stability, and for financial sustainability of Bosnia and Herzegovina? 

SOFTIĆ: None attack to the system institutions of Bosnia and Herzegovina is good. The Indirect Taxation Authority of Bosnia and Herzegovina is one of the most important institutions of Bosnia and Herzegovina, through which many state vitally important activities are performed. The Law on Financing the Institutions of Bosnia and Herzegovina, as well as other legal regulations related to borrowing, debt and guarantees of Bosnia and Herzegovina, as well as payments to the single account and distribution of income clearly define the system of functioning, which is performed mainly through the Indirect Taxation Authority. There is a clear provision that primarily requires the repayment of the debt of Bosnia and Herzegovina, as well as the financing of state institutions. After that, their funds are distributed to lower levels of government. Any sudden transition to any alternative regime would have unforeseeable consequences. International creditors have already expressed concern about the process of servicing the due external debt if Bosnia and Herzegovina's Indirect Taxation Authority is unilaterally established at the Entity level. International rating agencies are also closely monitoring developments. Apart from the potential challenges for servicing the country's international obligations, there is a high probability of tax evasion in that case, at least in the initial period. Reducing budget revenues, especially in the Entities, which are the main bearers of public sector activities, would lead to an increase in public debt, which would be more difficult and expensive to finance externally, but also reduce public sector spending and investment due to reduced fiscal space. In such cases, there are not only the interests of domestic stakeholders, but also international ones, so it is not easy and safe to start destroying system institutions. I believe that these activities would not bring benefits, only damage. 

STAV: As the Central Bank of Bosnia and Herzegovina compiles and analyses important macroeconomic data, can negative consequences of the political crisis which has become increasingly intensive recently, be seen in such data, for example, can this be seen in investment? 

SOFTIĆ: Having in mind the context and political environment, current economic activity is relatively good, however the fact remains that each year when the reform implementation has been postponed means weakening of the country’s long-term potential. Before the pandemic and before the latest political crisis, the growth was mentioned significantly below the level of around 6 per cent, which would contribute to a much faster convergence of a small and open economy such as ours with the European Union. Reports of rating agencies have pointed out for years that the main reason for the low credit rating of the country is political instability. The reports of the relevant supranational institutions, including the latest European Commission Progress Report for Bosnia and Herzegovina for 2021, state that the process of the necessary reforms is slow or even halted. Continuing of the current situation will additionally decrease potential growth, with demographic indicators deteriorating significantly due to negative natural increase and ageing of population, and mainly due to the leaving of citizens. All this does not contribute to the perception of the country attractive for foreign investments. 

STAV: On one hand we have domestic political crisis, on the other hand we have difficulties caused by the pandemic. How is this going to affect the economy of Bosnia and Herzegovina? 

SOFTIĆ: According to the latest autumn, medium term macroeconomic projections, we in the CBBH project the growth of real GDP in 2022 at 3.9%. The projected real economic growth rate for 2022 is significantly below the one currently projected for 2021 (5.8% according to the autumn round of projections), primarily due to the base effect disappearing. The prevailing negative risk for economic activity in the immediate periods is now related to rising inflation, and uncertainties remain regarding the duration of the pandemic and the epidemiological situation. Stronger than expected inflation shocks could have the effect of reducing available income, with negative consequences for one of the main components of GDP, private consumption. In 2022, we expect an increased contribution of investments as a result of unblocking the work of the FBH, Securities Commission, and the expected capital investments in infrastructure. Total investments, especially the part related to public investments, naturally depend also on the adoption of the budget, i.e., avoiding of the functioning in the temporary financing regime. Also, the turbulent political environment does not suit private investment either. On the basis of the above, we believe that risks for the future economic activity have been increasing in recent weeks, so projections for 2022 may be revised downwards in the spring round of projections. 

STAV: Although the Central Bank does not have many instruments to respond to crises, how do you estimate the role of the CBBH in the attempts to mitigate the crisis brought about by COVID? 

SOFTIĆ: The Central Bank of Bosnia and Herzegovina has undertaken, in the beginning of the pandemic, all the available measures according to its legal authorities. We have ensured liquidity of commercial banks in the form of sufficient quantities of cash and giro money in the currencies KM and EUR, so all the requests of banks and their clients have been met. This significantly contributed to the calming down of the situation caused by uncertainty which we all faced suddenly. Our required reserve policy, including our decision to keep the required reserve rate unchanged, was based on professionalism and expert knowledge, and the assessment that the banking system was not facing a liquidity crisis. Adding liquidity in a very liquid system simply did not make any sense, it would have even been counterproductive. All of our functions, including the payment system function, but also the fulfilment of the fiscal and banking agent role, were carried out smoothly, which additionally contributed to the stability of macroeconomic system on the whole. Finally, I would like to stress something often neglected, and that is the fact that the CBBH is an important partner for all relevant international institutions on the issues of assessing macroeconomic situation and trends in the country and is a reliable source of credible statistics. Contacts are continuing, complex and require high level of analytic capacities. The CBBH has been perceived as one of rare institutions always available for quality consulting and contributing significantly to the fulfilment of the country’s international obligations, particularly those in the EU integration process. All this is confirmed by the latest European Commission Progress Report, stressing that the currency board arrangement has remained stable and has not been jeopardised during the pandemic, which shows public confidence in the CBBH and makes it an important pillar of macroeconomic stability. 

STAV: Regardless of the fact that we are going from one crisis to another, as in a vicious circle of crises of all possible kinds, can you see some optimism for the beginning of 2022? 

SOFTIĆ: We are a small country, which is unfortunately, still at a rather low level of economic development and whose process of converging with the EU is in a significant delay. On the other hand, I always see it as a chance. With rather small steps and some good political will, improvements, especially those in the standard of living would be visible in a very short period of time. With the implementation of the already identified and mapped structural reforms, which, unfortunately require political will firstly, I am sure that the process of convergence with the EU would be much faster. I frankly believe that national tensions in the country would decrease if an average citizen lived better. I still believe that we will develop as a society, abandon non-productive rhetoric and focus on things which make our lives better.