Bosnia and Herzegovina

Bosnia and Herzegovina experienced several years of civil war and monetary chaos following independence in 1992, but the Dayton peace agreement at the end of 1995 included a plan for a new countrywide central bank to operate a currency board, and this was one of the few state-wide and effective institutions from when it issued the new currency in 1998.

Years Targets and attainment Classification
1992-5 independence (exit from Socialist Federal Republic of Yugoslavia) 1992 followed by 3-4 years of civil war with dire economic effects; two currency arrangements, two governments, heavy central bank deficit financing in both, hyperinflation 1992-3, widespread use of other currencies, some stabilisation from 1994 in Bosniak-majority area with peg to Deutsche mark (DM) but less in Republika Srpska (RS) which issued own currency 1992-3 and then adopted Yugoslav dinar 1994,  while Croat-majority area used Croatian kuna and DM unstructured discretion UD
1996-97 peace agreement end-1995 leaves major economic powers in hands of 2 constituent entities = Federation (Bosniak- and Croat-majority areas) and RS; plan for country-wide central bank to operate currency board for at least 6 years, 1996 Bosniak-Croat currency and payments arrangements partly integrated but RS financial system separate; in Federation large number of banks but many in Bosniak-majority area insolvent, central bank relies on forex intervention, reserve and liquidity requirements, discount facilities; in RS range of banks, most financially weak with high NPLs, while central bank, itself financed by Serbian central bank, relies on reserve and liquidity requirements and various credit facilities to its banks loosely structured discretion LSD
1998-2017 August 1997 new central bank begins to operate, as largely independent currency board on DM, under governor appointed by IMF and with restrictive legal statutes, with new ‘convertible marka’ (KM) currency initially as unit of account but banknotes issued mid-1998; most state-owned banks financially weak, but new, small, private and some foreign-owned banks starting up; efforts for cross-region integration of banking system laws, bank supervision and payments systems, with closure of monopolistic payments bureaux operating in each entity; significant remaining legacies from Yugoslav past and from civil wars, some disruption from Kosovo dispute 1998-99; new currency rapidly becomes accepted in all areas, forex reserves increased, while fiscal deficits gradually brought under control; conversion from DM mainly to KM (and of peg from DM to euro) 2002; 2004 many key statistics still unreliable; reserve requirements are only monetary instrument, reformed 2003, separated between short- and long-term deposits 2008, but not varied regularly; no lender of last resort capacity; fiscal council set up mid-2006, but continuing constitutional issues impede reform, e.g. on integrating bank supervision; adverse effects from GFC, but  appropriate (fiscal and financial stability) policy response; reviving constitutional/political tensions after 2010 elections delay policy decisions; improvements to banking supervision and resolution; domestic capital markets remain very limited; statistical database improved by end of period but some weaknesses remain pure currency board PCB

Selected IMF references: SR – Use of Fund Resources– Emergency Post-Conflict Assistance 1995 pp1-10; RED 1996 pp22-45, 119, 123; SR 1996 pp4-6, 8-12; SI 1998 pp9-10, 14-29; SR 1998 pp12-15, 19-20; SISA 2000 pp15, 19-26; SR 2000 pp4-12; SR 2002 pp12, 19-20; SEI 2004 pp4-14; SR 2004 pp15-17; SR 2006 pp11, 16-17, 18-19; SR 2007 p18; SR 2010 pp4, 9-13; SR 2012 pp13-14; SR 2015 pp15-19; SR 2018 pp16, 47-8, Informational Annex pp9-10.

Other references: Central Bank of Bosnia and Hercegovina (2017, pp19, 21-2).

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