The era of economic reconstruction
THE AMBITIOUS FREE TRADE AGREEMENT SLATED FOR 2002, IS SET TO BE THE ICING ON THE CAKE AS THE BOSNIAN BANKING SECTOR COMPLETES A MAJOR OVERHAUL

MONUMENTAL ACHIEVEMENT The Central Bank’s introduction of the Bosnia and Herzegovina Convertible Mark, pegged to the Deutschmark, has been one of the cornerstones of the country’s economic recovery

Six years after the war that devastated the former Yugoslavia, Bosnia is now at peace, but politically and economically divided. It is also beset by high unemployment and low wages.
The governor of the central bank, New Zealander Peter Nicholl, appointed by the IMF five years ago, has made giant strides in improving the situation. In the early days political differences held up his opening of the Sarajevo, Pale, Mostar and Banja Luka offices and even caused disagreements over the proposed format of the new Bosnian currency, which he ended up designing himself. Today, virtually no politics hinder the economy, and with his original board unchanged, he has a hardworking and experienced team to whom he can comfortably delegate responsibility.

His major achievements have been to convince Bosnians that the legal structure put together by local staff, the IMF and U.S. treasury was a good one, and get them to accept the Convertible Mark (KM) which is pegged to the Deutschmark (DM) and traded effectively with Austria, Switzerland and Germany. Payments reform was another key move. The old payment bureaus, unique to the former Yugoslavia, were closed and payments transferred to commercial banks, which people had rarely used in the past. “They can begin to develop a normal customer relationship getting the normal range of banking services,” says Mr. Nicholl. This includes credit cards, which could not even be used a year ago.

The country has too many banks, in his opinion. “Half are doing most of the work,” he says. His role as governor was to encourage the process of increasing minimum capital, and he is gratified to see banking agencies following this policy and inducing consolidation and mergers. “Those banks who cannot find a merger partner are being closed,” he says. He would like to see the number of banks cut down to twenty by the end of 2001.
“The banking sector would not have gotten where it is without U.S. support,” says Mr. Nicholl. Their funding–without strings–helped build new clearing houses and arrange new payment systems. Now that the country is beginning to stand on its own two feet again, he would like in his final two years to see banking supervision become a totally Bosnian-run institution.

FIPA (Foreign Investment Promotion Agency) was set up in July 1999 as a non-profit organization acting within the Council of Ministers, which funds it. Based in Sarajevo, it specializes in providing services to foreign investors, improving Bosnia’s image regarding foreign investments and attracting new business. General Manager Mirza Hajric has seen the ravaged postwar economic infrastructure make a successful recovery from socialism to a free market economy. Today’s wider range of democratically grouped parties are united in their wish for economic growth and investment and FIPA is now working on a legal framework to provide the necessary security for investments and institutions.

Though the World Bank, the European Bank for Reconstruction and Development and the IMF started exploring Bosnia two years ago, the U.S. has shown little interest in investing here apart from establishing a Coca-Cola plant. “We need to promote Bosnia aggressively as the land of opportunities,” says Mr. Hajric.” An American Chamber of Commerce has now opened and FIPA has an informative website. “I think U.S. investors would be most interested in our agriculture, cattle and energy, which is hydro- or wind-produced,” he says. Other resources ripe for funding include lumber, dairy products, metal and transportation.

At present, FIPA is dealing with 25 different interests and a total of 2,000 companies are up for sale. “The initial phase of privatization is an excellent chance for foreign investors,” says Mr. Hajric. “Whoever comes here first will make the most money.” Main advantages for investors are that labor is cheap and Bosnians are renowned for working well internationally. Economic conditions, too, are favorable: “We have the most stable convertible currency in the region and no inflation,” he observes. Though political changes have sped things up, the system still needs adjusting and new laws have to be approved to satisfy the world market. FIPA feels the 2002 Free Trade Agreement will be the real test of Bosnia’s reforms.