What’s the use of BAM for Bosnia and Herzegovina: Is it better to switch to the euro or still have a “pegged” currency?

SARAJEVO, While neighboring Croatia plans to become part of the eurozone in 2024, and Montenegro has long since adopted the common European currency, a logical question is whether the BiH commitment to its own currency remains justified. Vjekoslav Domljan, a distinguished professor, does not doubt that the BAM is a noose around the neck of the economic development of our country.

Professor Domljan reminds that the currency board is an imperial creation and that, nowadays, it is reduced to only five small countries (BiH, Bulgaria, Djibouti, Brunei and Hong Kong) and six micro countries (six Caribbean countries) that have pegged their currency to the American and Singaporean dollars, or the euro.

“In our country, it is strange that the amount of money in circulation does not follow the current balance of payments, which can be attributed to the large underground economy. There is no research of this kind in BiH, but research in Djibouti shows that their currency board is maintained thanks to hawala remittances, ie. informal remittances from abroad,” says Domljan.

Due to the inflexibility of both the financial sector and the public sector, negative shocks from abroad are transmitted to the BiH economy primarily through reduced employment and reduced private sector wages.

“Since BiH does not have a monetary policy nor an exchange rate policy, and since its fiscal policy is ‘nailed’ by laws, the only remaining option is to pump aggregate demand with budget deficits and losses of public companies. It would be better to encourage aggregate supply by reducing taxes, contributions, parafiscality, regulations, etc., but it seems that this is the last thing the authorities would do,” he said.

Professor Domljan states that there are several alternatives to the current situation in which the exchange rate for 2 BAM is 1 EUR.

“There are several possibilities. It is possible to peg BAM to the euro at another exchange rate; peg BAM to another currency or to a basket of currencies; let BAM float or, the best option: euroization. BiH has failed to do what Montenegro and Kosovo had done. The two countries have the same monetary stability as BiH, but without taking money out of the pockets of citizens and companies in favour of—as the song says: “Half for me and half for you”—salaries and buildings of the currency board custodians and the central government budget expenditures. Simply put, that loss of social welfare amounts to as much as the interest on the amount of money in circulation when that money is deposited with a commercial bank,” he states.

Domljan also states that it is enough to say what other influential economists think about the currency board.

“Nobel laureate Krugman calls Hanke, the man who introduced the currency board in BiH, a ‘monetary Rasputin’, a ‘fog seller’.” It doesn’t hurt to recall the thought of one of the greatest economists of all time, J. M. Keynes, who back in 1945 said: “Existing currency boards are so insanely outdated and unreasonable from the point of view of anyone’s interest other than our own. The view that a country can increase the amount of money in circulation only if it is able to cover that increase 100% with foreign resources, belongs—I am convinced—to an age that will never return,” Vjekoslav Domljan concluded for Klix.ba.

The convertible mark (BAM) has been in circulation in our country since 1998, and has replaced the Bosnian dinar. During the introduction of BAM, upon the decision of the Central Bank of Bosnia and Herzegovina, a currency board was introduced, according to which each banknote was pegged to the German mark, and is now pegged to the euro. Each issued banknote has a monetary cover in euros. It is the currency board that is often highlighted as the most positive part of the tight monetary policy in our country, the guarantor of currency stability and low inflation rates.



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