A. Introduction

There is only one central bank in Bosnia and Herzegovina (BiH). In most countries, that would be an unexceptional statement. But in BiH it makes the Central Bank of Bosnia and Herzegovina (hereinafter: CBBiH) rather unusual amongst financial sector organisations. The fact that there would be only one central bank in the country was specified in Annex 4 of the Dayton Peace Agreement, the Constitution of Bosnia and Herzegovina. The Constitution of BiH adopted following Dayton further elaborated the status of the CBBiH. Article III specified monetary policy as one of the responsibilities of the institutions of BiH while Article VII set out some of the key characteristics and responsibilities of the CBBiH.

On 30 October 1996, the Presidency of BiH appointed three local members of the Governing Board. They were Manolo Čorić (RS) and Kasim Omićević and Jure Pelivan (Federation of BiH). All of them were very senior and experienced persons. On 5 November 1996 the IMF, in consultation with the BiH Presidency, appointed Serge Robert of France as Governor. The IMF Resident Representative in BiH, Alessandro Zanello, assumed the responsibilities of Governing Board Secretary. While the CBBiH as an institution did not commence its central banking functions until August 1997, its Governing Board was established nine months before that. Its first task was to develop a complete CBBiH Law based on the principles set out in the Constitution.

They worked extremely intensively over the next six months. There was also a lot of international input, primarily from the IMF and the US Treasury. Once the decision was taken at an early stage that BiH would introduce a currency board arrangement, and this was specified in the Constitution, many of the key policy elements of the law were determined. Currency boards operate under clear and detailed ‘rules’ and these are all incorporated into the CBBiH Law. The discussions and negotiations on the draft law were therefore about secondary issues but there were lengthy debates nonetheless on the following issues:³⁸⁸⁰

■ the degree of decentralisation there would be in the CBBiH’s structure (the CBBiH has a Head Office in Sarajevo, three Main Units in Banja Luka, Mostar and Sarajevo and two branches in Brčko and Pale);

■ whether or not the CBBiH would also be the banking supervisor (two Entity Banking Agencies were established with the CBBiH having a relatively minor ‘coordination’ role);

■ the way in which the country’s international reserves would be managed (as one pool or two? A single pool managed by the Head Office was agreed to);

■ the name and design of the new Bosnian currency (the name was set out in the law, the Konvertibilna Marka (convertible mark). The design process took many months of discussion.

The Board developed a full legal text of ten chapters and seventy-six articles in this six-month period which was endorsed by all four Governing Board members. It was formally adopted by the Presidency on 28 May 1997 and adopted by the Parliamentary Assembly on 20 June 1997. While there was a lot of international input into the CBBiH Law, the law was a good example of co-operation and co-ordination by locals and internationals as the law was approved and promulgated through the Bosnian political process.

Article 2 of the 1997 Law on the Central Bank of Bosnia and Herzegovina specified the following objectives and tasks for the CBBiH:

1. The objective of the Central Bank shall be to achieve and maintain the stability of the domestic currency by issuing it according to the rule known as a currency board.

2. The basic tasks of the Central Bank performed under the authority of its Governing Board shall be:

(a) to formulate, adopt and control the monetary policy of BiH by issuing the domestic currency at the exchange rate as stipulated in Article 32 of this Law with full backing in freely convertible foreign exchange;

(b) to hold and manage the official reserves of the Central bank in a safe and profitable way;

(c) to promote or to establish and maintain appropriate payment and settlement systems;

(e) to coordinate the activities of the agencies responsible for bank licensing and supervision in the Entities;

(g) to receive deposits from BiH and from commercial banks to meet reserve requirements. The Central bank may also hold deposits of the Entities and other public institutions and other reserves of commercial banks of these so desire;

(h) to put into and to withdraw from circulation the domestic currency … adhering strictly to the currency board rule defined in Article 2, Section 3 of this Law.

Following further intensive work by the first Governing Board, with considerable technical assistance from the IMF, the CBBiH commenced its operations on 11 August 1997. The financial environment in which it started was a very complex one. Two central bank-like institutions existed in the National Bank of BiH in Sarajevo and the National Bank of the RS (both were branches of the former National Bank of Yugoslavia that had become separate institutions during the war), the government-owned Payments Bureaus played a major role in the banking and payments systems, though there were essentially three separate regional Bureaus in BiH, and there were four currencies in use in the country, the Bosnian Dinar, the Yugoslavian Dinar, the Croatian Kuna and the German Mark.

In August 1997, the IMF offered Peter Nicholl³⁸⁸¹ the position of Governor of the CBBiH. Mr. Nicholl had taken part in the analytical and drafting work that preceded the passing of the Reserve Bank of New Zealand (RBNZ) Law in 1987. This law put in place a new legal and operational structure under which the RBNZ has operated since that time and explicitly gave the RBNZ operational independence for the first time.