“We started with foreign exchange reserves covering just one week of imports,” recalls Nicholl. “Today they cover five months worth of import payments, inflation is stable, and we have a sound banking system.” Under Nicholl, the central bank masterminded the introduction of a new currency, spearheaded the consolidation of the banking sector, and put in place a modern payment system. Indeed, it has come to be seen as a beacon of stability in a country still recovering from conflict. Part of the credit for this strong performance goes to Nicholl, a 61-year-old New Zealand-born economist who headed the CBBH for seven years until he stepped aside at the end of 2004.
The authorities have been very slow in closing weak or nonperforming banks. This needs to accelerate.
Under the terms of the Dayton accord, the IMF was charged with appointing the governor of the new central bank. To minimize ethnic rivalries among Bosniacs, Croats, and Serbs, the law establishing the bank specified that for the first six years the governor should not be a citizen of Bosnia and Herzegovina or a neighboring country. Nicholl, an Executive Director of the World Bank with 22 years’ experience at the Reserve Bank of New Zealand, was chosen to succeed Serge Robert of France who served briefly as the first governor in 1996–97.
“I was offered Bosnian citizenship in order for me to stay on as Governor beyond the first six years, as after that time governors had to be citizens of Bosnia and Herzegovina. I was honored to accept it,” Nicholl told the IMF Survey. “I saw it as a clear sign that they appreciated the job I had done and wanted me to stay.” He has continued in Sarajevo as an Advisor to Kemal Kozarić, a career banker who took over as the first local governor of the CBBH.
Law underpinned success
Nicholl says that the key to later success was the drafting of a solid central bank law that was approved by the parliament and enabled him to stand up to opposition. “Without that sound, strong law, I do not think I would have succeeded in establishing an efficient and effective central bank in Bosnia and Herzegovina,” says Nicholl. “The CBBH law made the central bank independent. But establishing that independence in practice, both within the central bank and outside, was one of my first key challenges.”
Nicholl, described by colleagues as a good listener who is also tough and sometimes blunt, had to deal with the legacy of ethnic tensions while establishing trust in the new bank. “Another challenge was first understanding and then trying to do something about the complicated accounting relationships between the new central bank, the old National Bank of BiH, and the government-controlled payment system that had a monopoly on domestic noncash payments. These relationships led in the first few months to several breaches of the currency board requirements specified in the central bank law and it took a year to resolve them. Until they were resolved, certain ethnic groups in BiH did not trust the CBBH,” he says.
Internally, Nicholl—who was chief economist at the Reserve Bank of New Zealand for five years before becoming Deputy Governor—borrowed from his home experience. “I have put in place internal mechanisms and systems that are as close as possible to those I had seen work well in New Zealand, including annual plans, annual budgets, formal monitoring systems, a management committee, and an investment committee. I think the CBBH shows that if you put in place sensible legal and administrative systems, you will get sensible and predictable behavior and performance. But there are few other institutions in Bosnia and Herzegovina that have been set up on this logical basis,” adds the silver-haired central banker.
Still, old ways died hard for the staff of the new bank. “The initial staff tended to work in cliques based on which institution they had come from. This often had an ethnic element as well. It took time to get them working together as a single institution. They initially took over the personnel systems and policies from old Yugoslavia, which tended to be very detailed and prescriptive.”
New currency: an early priority
Creating a new currency for the new country was one of the early priorities. Agreeing on a name and design for the new currency were initially hotly contested issues. But the new banknotes, printed in France, were eventually issued on June 15, 1998, and the previous BiH dinars were demonetized just two weeks later. The new currency, called the convertible marka (KM), was fully backed by a strict currency board arrangement that tied the KM initially to the deutsche mark (DM) and then the euro. Despite some early hiccups, the currency board has been very effective. “I do not think there is any type of monetary policy—other than the adoption of the deutsche mark as the currency of Bosnia and Herzegovina from the beginning—that could have given this country a stable currency and low inflation so quickly. Where there is little capacity to exercise discretionary policies, it is best to set up institutions that eliminate discretion. They are the only ones the citizens will trust and use,” says Nicholl.
The currency board model has worked well in several transition economies. “The experiences of the Baltic states, Bulgaria, and now Bosnia and Herzegovina have shown that the currency board model is very successful in Eastern Europe,” says Nicholl. He identifies three reasons for this:
- citizens in these countries trusted the base currency (initially the DM and later the euro) much more than they trusted their own institutions and currencies;
- there were strong trade and economic links to the base currency; and
- eventually joining the European Currency Union provides a natural exit strategy from their currency board arrangements.
Another priority has been the banking system. When Nicholl arrived, there were 76 banks for a population of 4 million, and not one of them operated over the whole country. Now there are 33 registered banks, but 80 percent of the deposits are in 8 banks. “I think the system will consolidate on around 12–16 banks. Most of the big steps have actually already been taken,” Nicholl states, although he adds that “the authorities (governments and banking agencies) have been very slow in closing weak or nonperforming banks. This needs to accelerate.”
Other outstanding challenges, according to Nicholl, are developing the capital markets (currently very small) and attracting more foreign direct investment to develop the private sector.
Need to speed up reform
What’s the economic outlook for the country? “There are two things that make it difficult to predict the economic outlook in Bosnia and Herzegovina with precision,” says Nicholl. “First, the country is going through so many transitions simultaneously that the economic numbers can, and do, move through very large ranges. Second, and more important, the economic outlook depends crucially on an acceleration of the economic, regulatory, and legal reforms and faster privatization. Forecasts based on the status quo as compared with those based on an accelerated reform path will be very different. Indeed, unless the reform process is accelerated, Bosnia and Herzegovina will have a very difficult future.
“But I am an optimist. I believe we will see a combination of continued macroeconomic stability and accelerated microeconomic and legal reform and privatization. On this basis, I predict economic growth rates can be around 6–7 percent per annum, inflation will remain subdued at around the current rate of 1 percent, and the current account imbalance will gradually improve.”
Many close shaves
Has Nicholl ever felt in personal danger during his time in BiH? “I have never had special security and have never felt the need for it,” he says. “There were some threats made during the process of closing the payments bureaus, but nothing occurred. The only time I feel at risk here is when driving on the roads—poor roads, poor driving, and frequent poor weather make a dangerous combination. I have not had any accidents—but many close shaves.”