Omerbegović Arapović: Only Those Who Want Chaos in the Country Can Advocate Playing with the Central Bank

At a time when the sustainability of the currency board is already under pressure due to irresponsible public policies, growing public debt, long-term unsustainability of the current account balance, but primarily political instability, advocating for the withdrawal of money from the Central Bank of Bosnia and Herzegovina is shocking, regardless of the technical details of this story, says macroeconomist Prof. Dr. Adisa Omerbegović Arapović in a comment for the Patria news agency.
Furthermore, she reminds, "The Central Bank does not keep foreign currency reserves in a safe, 'but invests them, e.g., in French government bonds, so this is an investment like any other that can result in profit or loss.'"

The President of the BiH entity Republika Srpska, Milorad Dodik, has been seeking money from the reserves of the Central Bank of BiH for some time. According to their idea, this money would be used to solve financial problems in the country. Member of the BiH Presidency Bakir Izetbegović also supported the proposal to take money from the Central Bank of BiH, which, in his words, could be used for the economy. 

Asked whether it is realistic to expect the Central Bank of BiH to invest the money that Dodik and Izetbegović are talking about into the economy, and what that money in the Central Bank actually serves for, Professor Omerbegović Arapović says she believes there is no surplus of reserves that some politicians are talking about.

"The legal rule is that the profit from the Central Bank's operations (in the amount of 5% of the money of the so-called liabilities that the reserves cover) is retained, and this rule exists for responsible reserve management. The Central Bank can also operate at a loss, and this rule has been in effect since 1997 to ensure the adequacy of reserves and their responsible management," says Professor Omerbegović Arapović.

"So, the percentage of 5-6% 'surplus reserves' that is now being debated in public has always been an amount programmed by the Law and has never been subject to appropriation (nor can it be without changes to the Law). Only now, when governments in BiH are losing their fiscal footing, are they attacking this money, which is more of an accounting category than any accumulated money waiting somewhere for them to create consumption from it and thus gain voter support," adds Omerbegović Arapović.

The prominent macroeconomist reminds that the Law on the Central Bank defines the rules for distributing the Central Bank's profit if these investments have made a profit, and the Central Bank's Governing Board is obliged to distribute the profit in accordance with this law. The Law, she further reminds, stipulates that profit is also allocated for fiscal matters decided by the Parliamentary Assembly of BiH, "so public debate on this issue is superfluous."

Professor Omerbegović Arapović believes that "those who play with the sensitive mechanism of the currency board show extreme political irresponsibility." Political interference in reserve management outside the existing legal framework, she says, pushes the entire society towards the abyss, because the negative consequences of the collapse of the currency board regime that such moves invite would not be mild and gradual, but sudden and radical. 

"When the currency board collapses, inflation does not appear gradually, but there is a sharp drop in the value of the currency, i.e., sudden inflation in a country that has an enormous percentage of imports, which would lead to a sharp decline in the living standard of citizens, but also the collapse of the economy whose credit costs rise enormously, since most loans are tied to the euro, so the devaluation of the convertible mark would cause the ruin of many companies that could not bear the extreme increase in loan installment amounts," says Omerbegović Arapović, and adds:

"Only someone who wants to cause chaos in the country can advocate playing with the Central Bank and tampering with foreign currency reserves. But, isn't this an economic expression of policies that stay in power by producing crises, for an entire decade? And yes, it usually happens when the system is unsustainable anyway and when only chaos can save some politicians from losing power."