Helicopter money the Bosnian way

By: Izudin Kešetović

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The idea of "helicopter money" is known in monetary theory and practice. It has been interpreted and applied differently. It is fundamentally linked to the function of the central bank as a "bank of banks" that regulates and
supervises the banking system. The proposal put forward by Prof. Dr. Ivan Lovrinović, full professor at the University of Zagreb, former dean of the Faculty of Economics in Zagreb, and a member of the Croatian Parliament, is worthy of attention from the wider Bosnian public. It concerns so-called "helicopter money" that the Croatian National Bank would give to all adult citizens.

As Lovrinović, a professor of monetary economics, stated, this would mean money gifted by the Croatian National Bank to the people of Croatia. Citizens, about 2.5 million adults, would receive 2,000 kuna in two installments, totaling about 10 billion kuna. If converted to KM, this would be about 1,000 KM per citizen, or about 2.5 billion KM for the country. How much money is that? It is best to compare the amounts with the average salary and GDP in Croatia. The average salary in Croatia in December 2019 was 880 euros or about 1,750 KM, GDP in 2019 was 53.969 billion euros or over 100 billion KM, GDP per capita was 13,969 euros, and the population, based on statistical estimates, was 4.0067 million at the end of 2019.

The comparison with BiH is interesting. In BiH, the population according to the 2013 census was 3,531,159, GDP - the gross domestic product of BiH is 1/3 of Croatia's GDP and in 2019 it was 33.408 billion KM. The GDP per capita indicator is 9,566 KM, while the average salary is 921 KM or about 450 euros.

Possibility of Application in Bosnia and Herzegovina

The conclusion is that the "helicopter money" model is difficult to apply in the case of Bosnia and Herzegovina, given the nature of monetary and fiscal policy. The idea itself is very interesting. If we know the basic principles of the BiH monetary system, which is based on the principle that there is no possibility of creating primary money, then the instruments of monetary policy are reduced. Namely, it is about receivables created by the central bank itself by crediting the state and commercial banks. The money creation system occurs through the multiplier, for both primary money from the central bank and credit money from commercial banks. Therefore, all talk about foreign exchange reserves as reserve currencies for the issuance of KM ceases. The reason is that this mechanism preserves the convertibility of KM, which is firmly pegged to the euro at a given parity. The principle is known as the gold standard rule or coverage in convertible reserve currencies. Ideas that emerge to abandon this principle are unrealistic given the nature of the BiH economy.

Anything that could be related to the idea of changing the nature of the application of monetary policy instruments could be within the scope of applying another rarely used instrument. This refers to selective credit policy, which would be implemented through the central bank and would be based on the possibility of financing the production of goods and services.

What does this mean from the perspective of BiH's economy?

The answer would be to find mechanisms for "canceling" money at the end of the reproduction cycle when goods are created on the supply side. The National Bank of SFR Yugoslavia used such a mechanism when it financed certain sectors and branches of production. For example, the production of agricultural products during the reproduction cycle of up to one year. The practice also applied to investments that led to rapid growth in the production of goods and services. In our conditions, this financing concept could be realized under the condition of the existence of a development bank or specialized banks for individual sectors. The prerequisite for this would be the existence of sectoral policies at the state level. At the same time, this would be a guarantee of maintaining monetary stability and economic growth as one of the priority goals of economic policy.

The possibilities of using mandatory reserves as a monetary policy instrument are limited due to the nature of the banking system itself. Liquidity reserves formed by banks and mandatory reserves
held by banks at the Central Bank of Bosnia and Herzegovina affect the liquidity of the banking system and play an important role in the stability and confidence in the financial system. The Central Bank of BiH holds mandatory reserves as a security measure in line with macroeconomic goals. The IMF Study from August 2019
, titled "Implementing a New Reserve Requirement Framework," provides insights into the trends in the mandatory reserve rate and the growth of private sector credit.

Finally, there are the instruments of quantitative monetary policy, which are related to interest rates and open market operations. Considering the nature of BiH's bank-centric financial system, the application of these instruments is very limited. The discount rate and the issuance of securities are fundamentally linked to public debt and the possibility of the state borrowing short-term from banks and the population. In fact, it concerns the function of the treasury and maintaining the liquidity of the public sector.

A brief elaboration of the possibilities of monetary and credit policy boils down to the key problems of deficit sectors, primarily the economy and the state. Any increase in the money supply could threaten
monetary stability. A particular problem that manifests itself in BiH is country risk, which is assessed based on market, liquidity, and political risks. It varies, which affects the interest rate. BiH is a country of risk, which particularly adversely affects foreign exchange inflows from investments and the export of goods and services.

Stability is provided to the system by foreign exchange remittances from citizens abroad, which are the main stabilizer in calculating the balance of payments and current account. Money inflows from abroad are the basis for consumption in the trade balance and the balance of public revenues and expenditures.

Concluding Assessment

The "helicopter money" model in Croatia is possible, given that the increase in the money supply relative to GDP would be only 2.5%, which is not so risky from the perspective of monetary stability compared to the demand effects that additional consumption would cause. The same model could not be applied in Bosnia and Herzegovina through the monetary system.

A possible solution is to redistribute funds through fiscal policy via the budget, following the same principle of remittances to all adult residents in two installments of 250 KM each. Funds could be secured from inflows to the single account from indirect taxes and transferred to all citizens of Bosnia and Herzegovina through the Budget of Bosnia and Herzegovina. A portion of the funds would be recovered through consumption via the so-called filter system. Likewise, this model would not infringe upon acquired legal rights related to pensions, disability benefits, and social assistance. This would protect the most vulnerable population groups in terms of income and achieve social and political goals.

Such non-standard measures in monetary and fiscal policy have the primary goal of restoring confidence in the state, the institutions of the system, and the government, which fundamentally represent the expression of the people's will. Other problems of the private sector would be resolved through systemic state measures aimed at strengthening fiscal and financial discipline.