SECOND BUSINESS ROUNDTABLE SECOND BUSINESS ROUNDTABLE WITH THE GOVERNMENTS OF WITH THE GOVERNMENTS OF BOSNIA AND HERZEGOVINABOSNIA AND HERZEGOVINA

Sarajevo, September 22-23Sarajevo, September 22-23

PETER NICHOLLPETER NICHOLL

GOVERNOR GOVERNOR

CENTRAL BANK OF BOSNIA AND HERZEGOVINACENTRAL BANK OF BOSNIA AND HERZEGOVINA

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THE CENTRAL BANK OF BH (CBBH)THE CENTRAL BANK OF BH (CBBH)

Commenced its operations on 11 August, Commenced its operations on 11 August, 1997 1997 A state-level institutionA state-level institutionOperates under its own LawOperates under its own LawAn independent institutionAn independent institutionIts strategic direction is set by a Governing Its strategic direction is set by a Governing BoardBoardIt has five offices:It has five offices:

Three Main Units – Banja Luka, Mostar and SarajevoThree Main Units – Banja Luka, Mostar and SarajevoTwo branch offices – Brčko and PaleTwo branch offices – Brčko and Pale

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The most important function of CBBHThe most important function of CBBH

The CBBH operates monetary policy The CBBH operates monetary policy through a Currency Board arrangementthrough a Currency Board arrangement

Choice of a Currency Board:Choice of a Currency Board:It Provides a firm nominal anchor in the form of a fixed It Provides a firm nominal anchor in the form of a fixed exchange rate. exchange rate.

It removed discretion in a situation where there was It removed discretion in a situation where there was considerable difficulty in establishing institutions and considerable difficulty in establishing institutions and making political decisions.making political decisions.

Works well in some other Eastern European CountriesWorks well in some other Eastern European Countries

MONETARY POLICYMONETARY POLICY

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The fixed exchange rate is specified in the The fixed exchange rate is specified in the CBBH LawCBBH Law

Full foreign exchange backing for all the Full foreign exchange backing for all the KM liabilities of the Central BankKM liabilities of the Central Bank

Full convertibility of the CBBH’s KM Full convertibility of the CBBH’s KM liabilities into the anchor currencyliabilities into the anchor currency

THE CURRENCY BOARDTHE CURRENCY BOARD

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The fixed exchange rate is 1KM = 0.51129 The fixed exchange rate is 1KM = 0.51129 euro. euro. Initial exchange rate was 1 KM = 1 DEMInitial exchange rate was 1 KM = 1 DEM

The KM exchange rate has been The KM exchange rate has been unchanged since the CBBH commenced its unchanged since the CBBH commenced its operations in 1997operations in 1997

Transition from the DEM to the euro as the Transition from the DEM to the euro as the anchor currency went smoothlyanchor currency went smoothly

THE FIXED EXCHANGE RATETHE FIXED EXCHANGE RATE

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CBBH FOREIGN RESERVESCBBH FOREIGN RESERVES

(end of period – in KM millions)

DATEDATE NET FOREIGN NET FOREIGN RESERVESRESERVES

MONETARY MONETARY LIABILITIESLIABILITIES

FREE FREE RESERVESRESERVES

Dec 1997Dec 1997 144,1144,1 161600,3,3 - 16,2- 16,2

Dec 1998Dec 1998 283,3283,3 253,9253,9 29,429,4

Dec 1999Dec 1999 865,7865,7 836,7836,7 29,029,0

Dec 2000Dec 2000 1021,21021,2 973,2973,2 48,048,0

Dec 2001Dec 2001 2666,62666,6 2591,62591,6 75,075,0

Dec 2002Dec 2002 2463,22463,2 2345,12345,1 118,1118,1

AugAug 2003 2003 22405405,,00 2226260,00,0 114343,,88

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FULL CONVERTIBILITYFULL CONVERTIBILITY

KM ISSUED FROM AUGUST 11, 1997 UNTIL KM ISSUED FROM AUGUST 11, 1997 UNTIL SEPTEMBERSEPTEMBER 1818, , 2003 2003 (in (in KM KM billions)billions)

KM ISSUED TO BH KM ISSUED TO BH BANKSBANKS

KM PURCHASED KM PURCHASED FROM BH BANKSFROM BH BANKS

NET KM ISSUEDNET KM ISSUED

11,11,744744 9,9,633633 22,,111111

The The table shows that the KM has been a table shows that the KM has been a convertible currency within BHconvertible currency within BH

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The Currency Board has been a very The Currency Board has been a very successful type of monetary policy for BHsuccessful type of monetary policy for BHThe KM has been a stable currency against The KM has been a stable currency against the DEM and the euro since it was the DEM and the euro since it was introduced.introduced.Inflation in BH is low and stable. Inflation in BH is low and stable. KM use has risen steadily and the KM is KM use has risen steadily and the KM is the dominant transactions currency in all the dominant transactions currency in all parts of the country. parts of the country.

SUCCESS OF THE CURRENCY BOARD SUCCESS OF THE CURRENCY BOARD

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INFLATION IN BHINFLATION IN BH

(Retail price index, Annual % growth)

Year endedYear ended Federation of Federation of BHBH

Republika Republika SrpskaSrpska

BH averageBH average

Dec 2000Dec 2000 4,04,0 16,116,1 8,08,0

Dec 2001Dec 2001 0,30,3 2,22,2 0,90,9

Dec 2002Dec 2002 - 0,7- 0,7 2,42,4 0,30,3

July July 20032003 0,0,44 11,,44 0,70,7

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FOREIGN DIRECT INVESTMENTFOREIGN DIRECT INVESTMENT(in KM millions)

PERIODPERIOD FOREIGN DIRECT INVESTMENTFOREIGN DIRECT INVESTMENT

19981998 117,4117,4

19991999 324,5324,5

20002000 310,1310,1

20012001 274,1274,1

20022002 604,604,33

2002 Q12002 Q1 140,8140,8

2003 Q12003 Q1 11881,71,7

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Decision of the BH Presidency that the Decision of the BH Presidency that the Currency Board will continueCurrency Board will continue

The Currency Board produced major The Currency Board produced major economic and social benefitseconomic and social benefits

Long term goal –Long term goal – take BH economy closer take BH economy closer and into Europeand into Europe

THE CURRENCY BOARD THE CURRENCY BOARD WILL WILL CONTINUECONTINUE

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New CBBH Board appointed from 11 New CBBH Board appointed from 11 August, 2003August, 2003

Governor Nicholl reappointed until 31 Governor Nicholl reappointed until 31 December, 2004December, 2004

Vice Governor Kemal Kozarić will become Vice Governor Kemal Kozarić will become Governor on 1 January, 2005Governor on 1 January, 2005

Decisions by the BH Presidency were:Decisions by the BH Presidency were:taken early, thus avoiding uncertaintytaken early, thus avoiding uncertainty

provide a high degree of continuityprovide a high degree of continuity

look well ahead, thus assisting the smooth transition look well ahead, thus assisting the smooth transition to a new Governor in 2005to a new Governor in 2005

NEW GOVERNING BOARD NEW GOVERNING BOARD

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REQUIRED RESERVES (RR)REQUIRED RESERVES (RR)

RR is the only instrument of monetary policy available to the Central Bank of BH, under the Currency Board ArrangementRR is the only instrument of monetary policy available to the Central Bank of BH, under the Currency Board ArrangementGoals:Goals:

Efficiency and flexibilityEfficiency and flexibilityHarmonizationHarmonizationFinancial stabilityFinancial stability

Features:Features:Applied to all deposits (KM & foreign currencies)Applied to all deposits (KM & foreign currencies)5% (CBBH 5% (CBBH LawLaw permit permitss ratio to be set by the CBBH Governing Board between ratio to be set by the CBBH Governing Board between 0% and 20%0% and 20%))Reserve deposits at CBBH are remuneratedReserve deposits at CBBH are remunerated

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CHANGES IN THE BANKING CHANGES IN THE BANKING SECTORSECTOR

Reform of the payment system Reform of the payment system

Significant increases in a banks’ minimum capital requirements Significant increases in a banks’ minimum capital requirements

Inter-entity banking Inter-entity banking

Deposit insuranceDeposit insurance

Arrival of foreign banksArrival of foreign banks

Privatization of government owned banksPrivatization of government owned banks

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CAPITAL STRUCTURE IN BH CAPITAL STRUCTURE IN BH BANKING SECTORBANKING SECTOR

(in %)

DATEDATE December December 31, 200031, 2000

December December 31, 31, 22001001

December December 31, 200231, 2002

May 31, May 31, 20032003

STATE STATE CAPITALCAPITAL

4747 1919 1010 88

PRIVATE PRIVATE CAPITALCAPITAL

5353 8181 9090 9292

DOMESTICDOMESTIC NANA 2525 2424 2121

FOREIGNFOREIGN NA*NA* 5656 6767 7272

* The data is not available, but the % of ownership would have been low* The data is not available, but the % of ownership would have been low

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An improving banking sectorAn improving banking sector Return of confidenceReturn of confidence

Return of depositorsReturn of depositors

Lending on more reasonable termsLending on more reasonable terms

Real competitionReal competition

High level of foreign investmentsHigh level of foreign investments

ObstaclesObstaclesHigh banking risksHigh banking risks

THE BANKING SECTORTHE BANKING SECTOR

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FUTURE INITIATIVES IN THE BH FUTURE INITIATIVES IN THE BH FINANCIALFINANCIAL SECTOR SECTOR

National Capital Markets Council (NCMC)National Capital Markets Council (NCMC)

Sovereign credit ratingSovereign credit rating

Securities marketSecurities market

Stock exchangesStock exchanges

Banking supervisionBanking supervision

Harmonization with the EU standards and regulationsHarmonization with the EU standards and regulations

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Economic outlook hard to predictEconomic outlook hard to predict

BH going through several transitions BH going through several transitions simultaneouslysimultaneously

Regulatory, tax and legal systems need to be Regulatory, tax and legal systems need to be changedchanged

Improving, but still too complicated, environment Improving, but still too complicated, environment for private investmentfor private investment

Stable macroeconomic situationStable macroeconomic situation

6% to 7% expected economic growth rate per 6% to 7% expected economic growth rate per annumannum

For investment in BH, the balance between For investment in BH, the balance between opportunity and risk now favors opportunityopportunity and risk now favors opportunity

THE ECONOMIC OUTLOOKTHE ECONOMIC OUTLOOK