One Currency for Bosnia
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One Currency for Bosnia Creating the Central Bank of Bosnia and Herzegovina By Warren Coats 2007 One Currency for Bosnia Creating the Central Bank of Bosnia and Herzegovina By Warren Coats, Ph.D. CONTENTS PREFACE ................................................................................................................................ 4 I. INTRODUCTION ................................................................................................................ 5 II. SARAJEVO ........................................................................................................................ 6 III. DAYTON ........................................................................................................................... 7 A. BACKGROUND ............................................................................................................ 7 B. IMF ROLE .................................................................................................................. 9 BOX 3: DOLLARIZATION ................................................................................................. 16 C. CURRENCY BOARD ARRANGEMENTS ....................................................................... 18 D. FINAL AGREEMENT .................................................................................................. 23 IV. DEVELOPING THE CENTRAL BANK LAW ........................................................... 24 A. OUR FIRST MEETING ................................................................................................. 25 B. THE SECOND MEETING .............................................................................................. 27 C. NOVEMBER MEETINGS .............................................................................................. 29 V. THE PAYMENT BUREAU SYSTEM ........................................................................... 42 A. BANK PAYMENT SYSTEMS ........................................................................................ 42 B. THE POST WAR SYSTEM IN BOSNIA ........................................................................... 44 C. CASH SETTLEMENT .................................................................................................. 47 VI. ADOPTING THE CENTRAL BANK LAW ................................................................ 51 A. STEVE HANKE .......................................................................................................... 51 B. FEBRUARY 1997 MISSION ......................................................................................... 55 C. THE OUTCOME ......................................................................................................... 62 VII. PREPARATIONS FOR THE CENTRAL BANK’S START UP ............................. 70 A. THE JUNE 1997 MISSION .......................................................................................... 70 B. JOHN DALTON’S VISIT .............................................................................................. 81 VIII. THE OPENING ........................................................................................................... 83 A. MY ARRIVAL IN SARAJEVO ...................................................................................... 83 B. THE BANK BRIEFING ................................................................................................ 86 C. THE FINAL FRIDAY FOR NBBH AS A MONETARY INSTITUTION ............................... 88 D. THE LAST WEEKEND ............................................................................................... 93 E. MONDAY - AUGUST 11 ........................................................................................... 102 F. TUESDAY - AUGUST 12 ........................................................................................... 105 G. WEDNESDAY - AUGUST 13 .................................................................................... 108 H. THURSDAY - AUGUST 14 ........................................................................................ 110 I. FRIDAY—MY LAST DAY .......................................................................................... 112 IX. THE MORE COMPLETE “OPENING” ................................................................... 114 A. IMMEDIATE ISSUES ................................................................................................ 114 B. CROAT COMPLAINTS .............................................................................................. 119 C. THE NBBH PROBLEM SOLVED AGAIN ................................................................... 131 D. OPENING THE MAIN UNITS .................................................................................... 149 E. NEW BANKNOTES ................................................................................................... 152 F. PROMOTING THE KM .............................................................................................. 163 X. PAYMENT BUREAU REFORM ................................................................................. 173 A. THE TRANSFORMATION STRATEGY ....................................................................... 174 B. MOSTAR AND DUBROVNIK ..................................................................................... 187 C. DAVID WHITEHEAD ............................................................................................... 198 D. KIM RHEE .............................................................................................................. 214 XI. FAREWELL SARAJEVO ........................................................................................... 215 XII. LESSONS LEARNED ................................................................................................. 218 A. PLANNING AND DONOR COORDINATION IS REQUIRED ........................................... 218 B. SHORT TERM NEEDS AND LONG RUN DEVELOPMENT ............................................ 219 C. THERE ARE NO BLANK SLATES ............................................................................. 221 D. POLICIES MUST REFLECT CAPABILITIES ................................................................ 221 E. POLITICAL SUPPORT FOR REFORMS IS NEEDED ...................................................... 222 XIII. POSTSCRIPT ............................................................................................................ 224 BIBLIOGRAPHY ................................................................................................................ 226 PREFACE I owe a deep debt of gratitude to many people, without whom this book could not have been written. First and foremost is the International Monetary Fund, which made the experiences I relate possible, and the many IMF colleagues and other experts I worked with in Bosnia and Herzegovina. From the IMF these include Juan Jose Fernandez Ansola, Scott Brown, John Dalton, Bruno de Schaetzen, Haizhou Huang, Gary O'Callaghan, Marco Rossi, Philipp Rother, Chris Ryan, and Alessandro Zanello. The talented and dedicated experts who worked with me under IMF contracts include: Jean-Luc Couetoux (Bank of France), Howard Crumb (formerly Federal Reserve Bank of New York), Leonard Fernelius (formerly Federal Reserve of Minneapolis), Benjamin Geva (York University, Canada), Simon Kappelhof (De Nederlandsche Bank), Hugh O’Donnell (Bank of Ireland), and Chaiha “Kim” Rhee (formerly IMF). They also include the first two governors of the CBBH Serge Robert and Peter Nicholl. I am also deeply indebted to the officials who sat across the table for enriching my life and helping to rebuild an integrated and efficient financial system. These include: local members of the Board of the CBBH— Manojlo Ćorić, Kasim Omićević, and Jure Pelivan— the Vice Governors— Enver Backović, Dragan Kovačević, and Ljubiša Vladušić—and staff of the CBBH in Sarajevo, Banja Luka, and Pale; CBBH Payment System Coordinator and Director of the Mostar Main Unit— Anka Musa; Directors of the Federation and RS Payment Bureaus—Maruf Burnazović and Ranko Travar—and their staff; Minister and Deputy Minister of Finance of RS— Novak Kondić and Gorolana Čenić Jotanović—and their staff; Minister of Finance of the Federation— Dragan Bilandzija; Director of the Banking Agency of RS—Simeun Vilendacić; and Director of the Federal Banking Agency—Zlatko Barš. Warren Coats Washington DC April 2007 I. INTRODUCTION A success has many fathers and a failure has none. The Central Bank of Bosnia and Herzegovina has many fathers and I am proud to be one of them. For twenty six years I was an economist with the International Monetary Fund (IMF). For most of the decade following the collapse of the Soviet Union, I led technical assistance missions to countries (or territories) to advise central banks, or to help establish them. Most of my work has been in former Soviet Republics or other so-called transition economies— those attempting to transform themselves from centrally planned to market economies. My goal as an employee of the IMF had been to help establish in these countries the institutional structures and expertise that are needed for stable and efficient monetary and banking systems compatible with market economies. My work, and the work of others in this grand endeavor, has been fascinating, taking me to previously unknown corners of the world and of economic analysis. In this book I share some of my experiences and explain some of the more interesting economic issues we confronted and attempted to