Six Percent Decline in GDP projected for Bosnia and Herzegovina

October 3, 2020 10:30 AM

 

Monetary policy and financial stability in the COVID-19 era, as well as, the financial sector’s response to the Corona crisis, are the topics of this year’s 8th Meeting of Central Bank Governors in Rovinj, Croatia, attended by the Governor of the Central Bank of Bosnia and Herzegovina Senad Softic.

The monetary policy response to the COVID-19 pandemic has been successful in stabilizing financial markets. While unconventional monetary policy measures, like large scale-asset purchases and liquidity injections, were developed and used only by central banks of major economies during the big financial crisis, the pandemic has pushed smaller central banks to start using similar measures.

Explaining the situation in the monetary and financial sector of Bosnia and Herzegovina during the COVID-19 pandemic, Governor Softić pointed out that since the beginning of this crisis, the CBBH has been closely monitoring domestic and international events. Due to the fact that the CBBH applies a strict currency board arrangement, it was not possible to follow the steps of other central banks and use some conventional or unconventional measures of monetary policy.

”Our first line of defense was to maintain the credibility of the currency board“, said Governor Softić, emphasizing that the only monetary policy instrument that the CBBH has at its disposal is a reserve requirement. Although, there were initiatives to change the required reserves rate, the Governor stressed that there was no real reason for that, because commercial banks keep a significant amount above the level of required reserves, adding that the currency board and a stable exchange rate against the euro contributed to the overall stability of the system, which was also confirmed by international rating agencies.

Recovery in Bosnia and Herzegovina will depend on the dynamics of recovery of our main trading partners, the countries of the European Union. All economies in the region will end up with negative GDP growth, this year. For Bosnia and Herzegovina, a decline in GDP of close to 6% is estimated, this year, while for 2021, the GDP growth is projected at close to 4%.

”With low domestic demand, including limited fiscal space, small private consumption and no monetary stimulus, the speed of recovery will largely depend on international capital inflows“, the Governor said. Having in mind the modest level of foreign direct investment in Bosnia and Herzegovina, with only 700 million BAM during 2019, the Governor stated that reliance on multilateral support has key importance.

At the end of the presentation, the Governor referred to the experiences of central bankers in crisis management. „From my point of view, coordination and communication proved to be essential tools in crisis management. Times ahead of us will be, no doubt about it, very interesting and challenging. Thinking about long-term issues and finding solutions for them to be more relevant than ever“, said the CBBH Governor, adding that many lessons have been learned from the COVID crisis, but that the crisis is not over yet.

”The real effects of the crisis will become visible when it is over, but in the meantime we have to learn to live with COVID and start thinking ‘outside the COVID frames“, concluded Governor Softić.

The Meeting of the Governors of the Central Banks of the countries in the region was organized by the business weekly magazine “ Leader” and the Croatian Banking Association, and the goal is to improve cooperation between financial institutions in the region and exchange of experiences in combating and mitigating financial crises and the overall economy.

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