Arapović: Dodik's request is not concern for BiH economy, but an attempt to attack the Central Bank

By Adis Arapović

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I will request that the negative mandatory reserve rate be abolished, that it be halved, so that it is 5 percent. This would release two and a half billion convertible marks of liquid assets through the Central Bank, which will affect bank liquidity and their ability to follow economic trends," said BiH Presidency member Milorad Dodik in Banja Luka on the morning of March 16.

On the afternoon of the same day, the BiH Presidency adopted Conclusion No. 13, which states: "The BiH Presidency and other competent institutions will consider the possibility of using the reserve funds of the Central Bank of BiH to amortize the effects of this crisis."

Any state intervention in the monetary system is always risky, and when it is done in unfinished states like Bosnia and Herzegovina, such an intervention is very dangerous. Dodik's request, repeated for who knows how many times, to unpack the reserves of the Central Bank, is more of a calculated and dangerous fishing in troubled waters than a concern for the economy.

Why? The mandatory reserve rate of the Central Bank, which secures deposits of citizens and companies in banks, was reduced to 10 percent due to the consequences of the financial crisis from 10 years ago, in order to motivate banks, through cheaper loans, to invest money into the economy. However, the reduction of the mandatory reserve rate was not effective, so banks, for their own interest, continued to hold significantly higher reserves than the prescribed rate.

As of March 16, 2020, the amount of mandatory reserve funds in the Central Bank is 5.5 billion KM (!), while the amount of mandatory reserves above the prescribed rate is 2.8 billion KM!!! This is twice as much as necessary, which means that commercial banks have an enormous surplus of money that they are not investing in the economy, nor in the population, nor in governments. Why was this issue not raised at extraordinary sessions?

Therefore, there is no need to reduce the mandatory reserve rate for banks. This will have no effect on helping the economy, because banks already have a surplus of money. What, then, is the goal of reducing this rate to 5% as proposed by Milorad Dodik?

In extraordinary circumstances, under the guise of fighting the virus, a political attack on the Central Bank, a stable currency, and a successful monetary system that proves that Bosnia and Herzegovina can succeed as a state is actually being repeated. Destabilizing the currency is always the best path to anarchy and the dissolution of the state.
To summarize: for all the surplus reserves that banks hold, the Central Bank pays negative interest rates (at the end of 2019, this rate was -0.5%).

Therefore, holding these surpluses with the Central Bank represents a loss of money for banks. Nevertheless, banks do this to reduce risk, despite the possibility of investing these funds in the economy and citizens of BiH. Dodik's proposed measure is completely contrary to the stated intention, which is for banks to invest funds in the population and the economy now when they need it most and to increase liquidity in the economic system. The measure would only reduce losses for banks and encourage them to hold additional reserves, as it frees them from costs when they do not invest funds through loans. And the economy would receive even less. Instead of finding a way to direct the existing surplus of money into the struggling economy, even if governments guaranteed commercial banks super-favorable loans to the economy and citizens.

P.S. The political attacks are clear and they can be stopped in the BiH Presidency. Support for attacks on the bastion of financial stability and statehood, which the Central Bank of BiH is, from Vjekoslav Domljan, who is the president of the Economic Council of the Government of the Federation of BiH and the "rector" of a very private Sarajevo university, is subversive action in a time of extraordinary circumstances and requires a reaction from the profession, but also from other competent bodies. With the statement that the "Central Bank is an anachronistic institution and that Dodik is right," Domljan reminds us that in moments of crisis, it is important to keep in mind that the fifth column never sleeps.