Constraints to be regulated by law

If Parliament wishes to constrain the central bank’s operational discretion, the constraints ought to be specified in the law. While it is not necessarily recommendable to constrain the operational independence of a central bank, if the Parliament or the Government do want to impose constraints, they should do so in the law so that everybody knows what those constraints are, and not do it by pressuring the central bank in other less transparent ways.

The CBBiH Law does place a number of operational limitations on the CBBiH:

■ no lending to the government;

■ no “lender of last resort” facility for banks;

■ no dealing in BiH securities.

There were good reasons for these constraints in 1997. First, the past experiences of Bosnians had led them to have little trust in their institutions. Second, the political, economic and social situation in BiH was very unstable when the CBBiH Law was being drafted and this made discretionary policies doubtful, to say the least.

This illustrates that the precise legal structure of the central bank’s objective and the degree of operational independence it is given do need to be adapted to the local realities and environment. These things can also change over time. For example, it is possible that as the economic and political situations in BiH become more stable and the breadth and depth of the financial markets develop, some of the current operational restrictions set out in the CBBiH law could be relaxed or removed. But the preconditions for doing this have still not been met in BiH and the strict currency board remains the best monetary policy option for BiH as it gives the country an important element of economic stability in an environment that still has considerable instability.