CONTINUITY OF A STABLE CURRENCY

Monetary policy

Ever since day one attempts have been made to devalue the new Bosnia-Herzegovina currency - convertible mark (KM) - by means of political marketing. However, they all ended in failure. x The replacement of the Bosnian-Herzegovinian dinar with the convertible mark should proceed without any problems as the new currency has the full foreign exchange backing. x What will happen with the Croatian kuna and the Yugoslav dinar?

AIM SARAJEVO, 18 April, 1998

The launching of the new convertible mark (KM) early this May will, after the start of the functioning of the railway traffic and establishment of a single Railway Enterprise, be yet another step towards economic (this time monetary also) reintegration of the state. Bosnia and Herzegovina will finally get a uniform currency (and a convertible one at that) which can be used in payment transactions in all parts of the state. After almost seven years, this will be an opportunity to gradually withdraw from circulation in B&H the currencies of the two neighbouring states (the Croatian kuna and the Yugoslav dinar) and send them back to their domicile states. For it should not be forgotten that in the past years money was one of the means for occupying, disintegrating and dividing B&H.

However, the same ones who determined the basic pace of events during the dismemberment of B&H have done everything they could to divert developments and events conducive to the reintegration of the devastated and toil-worn country. Immediately after the signing of the Protocol on the printing of KM with the highest French representatives in Sarajevo, Boro Bosic, Co-Chairman of the Ministerial Council of B&H, issued a statement in which he claimed that the National Bank of B&H has made a 30 million DEM worth incursion into the state payment system and that the Government in Sarajevo that same 1996, just before the elections, and with aid of additional money issue paid out pensions and wages seeking to secure social peace. A loan for these purposes was, allegedly, granted by the Central Bank of Bosnia and Herzegovina.

According to Bosic, by such a decision the Governing Board of the National Bank of Bosnia and Herzegovina has violated the Dayton Agreement and the Law on the Central Bank of B&H and on that basis introduced a convertible mark as a means for transfer account payments for which it did not have any backing. The message of this story of the Co-Chairman of the Ministerial Council is that this decreased the value of KM by 10 percent even before the new currency became a legal tender. Since the 30 million DEM was spent in the part of the state predominantly populated by the Bosniacs, according to Bosic the Republic of Srpska and the Croatian part of the B&H Federation, should not tolerate this, but demand a compensation for the damages from those who have used the mentioned funds.

The other, Croatian, side joined in these accusations. Nikola Grbovac, Deputy Minister of Foreign Trade and Economic Relations in the Ministerial Council of B&H said that the Bosniacs had offered the building of the Central Bank (The National Bank of Bosnia and Herzegovina) in lieu of the mentioned debt which was impermissible as the other two nations of B&H also had their share in that building.

It is obvious that politics is trying to sneak into this monetary scandal by the back door. However, the intention of these allegations is to devalue the KM (even before it comes into circulation) and keep B&H in a monetary chaos whereby currencies of the neighbouring states would remain in use as before. Interestingly enough, stories about the incursion into the payment system persisted even after they have been renounced by Jure Pelivan, a member of the Governing Board of the Central Bank (a Croatian representative), who pointed out that the loan in question would not have had any bearing on payment transactions and the convertibility of the new currency, since every printed bill was backed by German marks.

This was not enough to calm down the overheated situation surrounding the KM. The dust settled only after Peter Nichool, Governor of the Central Bank of B&H, clarified that the National Bank could not have granted loans to government institutions before 1996, on the basis of the approval of the Governing Board of the Central Bank of B&H, simply because the Central Bank of B&H started working only on August 11, 1997. Accordingly, the Central Bank of B&H could not have approved a 30 million DEM loan to the National Bank of Bosnia and Herzegovina. At the same time, the Governor denied the rumours that the KM has lost 10 percent of its value: "It is simply not true. The KM will not be devalued. Its exchange rate will be determined by the Law on Central Bank at the rate of one KM for one DEM. This rate has been applied since the establishment of the Central Bank of B&H and will remain so", said the Governor.

Explaining the situation in the National Bank of B&H, Peter Nichool said that the preliminary auditing carried out by the "Arthur Andersen" Company showed that the assets of the National Bank of B&H were below its liabilities on account of loans approved prior to 1996. Since liquidation proceedings for the National Bank of B&H have been initiated (William Dudley, from the USA will be in charge of these proceedings), the official receiver will confirm this fact and suggest a solution. Naturally, the solution does not imply that the Central Bank of B&H will finance the mentioned impaired assets, but that funds for these purposes will be secured from other sources.

In other words, the raising of dust concerning the alleged devaluation of the KM has proved unproductive so that monetary reintegration of B&H in May is quite certain and any efforts to thwart this project quite futile.

What does this mean for the Croatian kuna and the Yugoslav dinar which are now in circulation in B&H? Nothing else but their gradual withdrawal from the space of Bosnia and Herzegovina which will mark the monetary sovereignty and independence for B&H. Aware of this, politicians in the two neighbouring states have tried hard to create a monetary chaos in B&H so that their currencies could continue to circulate outside their states.

Some lessons could also be learnt from the recent talks Peter Nichool had in Zagreb regarding the exchange of kuna for the KM. According to the press, the Governor of the Central Bank of B&H returned from Zagreb empty-handed because the Zagreb officials would not even discuss the exchange of kuna for the KM by means of the DEM. The Croatian side insisted that the foreign exchange backing for kuna in B&H should be secured from the 90 million USD credit of the International Monetary Fund which Bosnia and Herzegovina will get after signing the stand-by arrangement. Following the same logic, credit funds to be received from the International Monetary Fund, should be also given to the Republic of Srpska as a foreign exchange backing for the Yugoslav dinar. Naturally, the authorities in Sarajevo reject such a possibility both regarding the Croatian kuna and the Yugoslav dinar since no one else but the Bosniacs have invested anything in this project while the credit, which the other two sides would use in this way, would have to be paid back by all.

All the above mentioned facts clearly show that Sarajevo will be able to maintain monetary stability achieved during war years, with the assistance of international financial institutions, even after the KM is put into circulation. The replacement of the Bosnian-Herzegovinian dinar with the KM should, therefore, proceed without problems as the new currency in B&H has full foreign exchange backing.

However, only time will tell whether there will be any problems with the Croatian kuna and the Yugoslav dinar in Bosnia and Herzegovina in their exchange for the KM. As bankers warn, the most important thing is to forestall the excessive inflow of these two currencies from the neighbouring states which the new system will make possible.

Raif CEHAJIC

(AIM, Sarajevo)