A stable currency is a necessary step in preparing any country towards a market economy. What has been your experience in this field?
One of the first things we did in the National Bank was the liberalization of the foreign exchange market. We abolished most restrictions, such as: all exporters had been obliged to sell 10% of their export income in currency and importers were obliged to sell 5% of their import incomes to the National Bank. This resulted in the increase of confidence in the system and with the increase of the foreign currency supply. We opened a network of exchange offices in the city, which never existed before. Also, we implemented a very strict monetary and fiscal policy, which means that we stopped providing credits to commercial banks, and we created money only based on foreign currency transactions in the first six months of this year. We succeeded in attracting money from the shadow economy and we increased the real Dinar money supply from only 750,000,000 DEM, which was the figure from October last year, up to 2,000,000,000 DEM, which will be the level at the end of this year. We also managed to increase the amount of foreign currency reserves of the National Bank, it was around 360,000,000$ and now we have 1.3 billion$. Plus, the commercial banks have some 500,000,000 $. This lower demand than supply of foreign currency allowed us to keep the exchange rate very stable this year. We adopted a floating exchange rate regime from January 1, this year - this is a so-called managed float. We are still developing our foreign currency market and the National Bank intervenes if there is a lack of supply on the market. Inflation in 2001 was 40%, but the so-called core inflation was only 11%. That means that the difference between 11% and 40% is the result of price liberalization and the elimination of price discrepancies. We inherited prices, which were controlled administratively. Now all prices of goods are market prices, only bread is somewhat subsidized by the government and there are still some utilities that need to be liberalized. This is the reason why we had an inflation rate of 40%. If we exclude this effect of price liberalization than the core inflation in 2001 was 11%. On the other side we have a surplus in services and a surplus in transfer payments and capital balance. Our overall balance of payment is in surplus this year, some 400,000,000 $. This allows us to keep the foreign exchange rate stabile.
Some say that the Dinar is overvalued. Can you assure investors that it will stay at the rate where it is now, that it will not devaluate fast?
Of course I can assure them. The ratio between our foreign currency reserves and our money supply is 140%. It means that we have more foreign currency reserves than Dinars in circulation. We can supply buyers of foreign currency without any problems. We will carry on with the process of bringing back money from the shadow economy with additional tax reforms and regulations. We also want to continue with our confidence building measures. We hope that these measures will all contribute to the increase of our foreign currency supplies, which will allow us not to have any problems keeping the exchange rate stable. The second issue is that we had a real exchange rate appreciation this year, which was not the case in the previous years. Why? Because from 1994, after the hyperinflation, we had a much higher increase of the exchange rate on the black market than on the regular market and the prices were fixed, because the government controlled them. So, since 1994 there was a massive depreciation in the real exchange rate, which was only partially revised in 2001. If you are looking at the real exchange rate to the DEM, than there is still a space for at least 10-15% appreciation. I don't think that we will have any problems to continue with this policy. Of course we hope that with the restructuring in the real sector of the economy our export productivity will start to grow and we will be able to maintain a broad stability of the exchange rate.
Montenegro has already implemented the DEM and is now in process of adopting the EURO. Is this going to be more difficult or different here, because the DEM, even though liberally used, is not an official currency. How are you ensuring the transition from the DEM to EURO?
I feel confident that here there will not be a transition from DEM to EURO. For daily transactions people will not use EURO instead of the DEM. People had a habit of working only with the DEM. Our people are still working in Germany and this is a kind of tradition, if I can say that. The EURO is completely new for everybody. I believe that in transactions the only currency here will be the Dinar. However, I accept that some people will rather save their money in EUROs and in USD. The introduction of the EURO will help to have more confidence in the domestic currency. This will also help us to rebuild confidence in the banking system and attract money from under the mattresses. People do not believe in the banking system, because we used to have pyramid schemes with 50% monthly interest rates as a result of which people were deprived of their saving deposits. However, foreign currency deposits in state banks were frozen from 1991 until last year when we finally started paying them out. We had hyperinflation. This is why the population did not believe in the banking system. It was a similar situation with companies, which kept their foreign currency in safes. Now, we already have the first positive results of the measures of stabilization: In the past five months the banking system attracted some 370,000,000 DEM in their accounts. These are not the same old state banks, but new solid banks, including foreign banks. We published a rating list of banks which are solvent and liquid and it can be found on our web site. After we assessed the situation in the banking system we decided to take took very tough measures. We closed 19 banks last year, which were illiquid and insolvent, because we wanted to keep only clean banks on the market. The old state banks that inherited the biggest losses were put under the BRA (Bank Rehabilitation Agency) and the four largest public banks were closed and put into bankruptcy on January 3, 2002.
What was the feedback from the banking sector, old and new domestic banks, right next door to Société Générale?
In the last five months we had a tremendous increase in deposits, in November 160,000,000 DEM and in the first ten days of December an additional 60,000,000 DEM. If you asked anybody a year ago would he keep his savings in foreign currency in a domestic bank everybody would say no. This is a complete rehabilitation of confidence in the system. We have six foreign banks here: Raiffeisen, Societe General, Hipovereins, Microfinance, National Bank of Greece and Alfa Bank from Greece. If you look at the ranking list of the banks, according to the new savings deposits, Raiffeisen is on the first place. They started to operate in September only. In three months they collected 63,000,000 DEM in deposits. Two domestic banks are on number two and number three: Vojvodjanska Banka, with 55,000,000 DEM and Komercijalna Banka 48,000,000 DEM. After that there is Microfinance, Delta Bank and Societe General. The list is on our web site. Foreign banks here have the opportunity to grow very quickly, much more quickly than anywhere else in Eastern Europe, because this market is hungry for good products. I think that the major boom for banking business will be next year, because a lot of excellent premises of liquidated banks are on the market. You can buy them if you want to develop your banking network. The process of liquidation is now conducted by the Bank Rehabilitation Agency, not by court, because it has to be quick. Nobody in Eastern Europe has taken such radical measures as FRY, closing the four major public banks. The process of reconstruction of the banking system lasted for four or five years even in the most successful Eastern European countries. Here it will be finished in one or two years! The movements we are doing are politically and socially risky, but I think economically much more efficient.
The first issue the investor is going to look at is the legal system, financial system and the investment climate. He has to have stable currency and stable environment for financial transactions. How is the National Bank using the situation in order to attract investments and companies into Yugoslavia?
The first priority was macroeconomic stabilization. Now we have taken major steps to restructure the banking system and we will finish it very quickly. | Many foreign investors might see Yugoslavia as a country, which is completely out of control. How could you convince investors now to come here?
In the financial area, for which I speak, the country is not out of control. Even at this moment 85% of the total payments are going through the new banks, so there is little risk. With the liquidation of the major public banks, the payment system is now 100% safe. What we are seeing is that there are some banks that used to go to the Eastern European markets in the latest phase of a county's development, like Citibank or Deutsche Bank seem to be much more interested in coming than it is usual for them. I could give you the example of Raiffeisen. Their plan was to open one or two branches and to see the situation in one year. They changed their plans when they saw the opportunities of the market. I think that the opportunities here for foreign banks are tremendous. We do not have credit cards, for instance we are starting this almost from the scratch. People are used to use cash. With confidence into the banking system there is a chance to develop a whole new business with credit cards. All international credit cards providers are now here and will start to operate soon. The second issue is that the population does not have access to any kind of credit. With increase in new savings such services for the population will open. Raiffeisen announced that from March they will start giving long-term and consumer credits. In six months they plan to start with residential credits and some other long-term credits. What is the big difference with other countries is that the human capital here is relatively skilled, we have never been a pure socialist country, and we already had some elements of market developed. We were the most developed country in Eastern Europe, before the former Yugoslavia fell apart, however we fell behind for the last ten years because of Milosevic. Now the goal of this government, that consists of technocrats, is to speed up as much as possible the process of transition. We have the experiences of other transitional countries, what they did well and what they did badly. Now we want to avoid their mistakes. Our goal is to complete the transition in the next three years. This implies, the complete reconstruction of the economic system. We believe our major advantage is our geographical position. Our goal is to attract foreign investors to locate their business in Belgrade as a center between Budapest and Athens. We think there is a major need in the region in South-eastern Europe. We want to become the center of a region that includes Serbia or Yugoslavia, Bosnia, Rumania, Bulgaria, Albania and we could say Croatia as well. We want to become much more attractive for business, not because of economic conditions only, but because of the favorable living conditions for managers who would like to do business here.
The law on banks is one of the most controversial, how will it change the business here?
The law has already been approved by the parliament, but it will be implemented from June 14, 2002. We gave time because we must create institutions, whose job will be to implement the law. We cannot convert all institutions in one day into typical capitalist institutions. We gave everybody one year to transform their businesses and transfer their money from safes into accounts of banks and than we will start to monitor them like everywhere in Europe. Of course, we already control the basic business. You cannot establish a bank if you do not have the proper audit accounts, for example. We refused a few applications for banking licenses, because from their applications it appeared that they were in a money laundering business. We, here in the National Bank are very conscious of the need to prevent money laundering. We allow only strong banks to open. Really, we are very tough. This is different than in Montenegro. They have a different strategy there, they are stimulating off shore business. We could say that we have two banking systems. We have tough, high requirements and standards almost like in most European countries. Montenegro, on the other hand is looking forward to becoming what Cyprus was in the 90's.
In general, what you are doing now is fighting against the gray economy. How do you feel you will be able to cope with the obstacles that such an enterprise poses in current day Serbia?
You see, I am not alone. The Ministry of Finance has the same aims like me. We have a strong team. Our biggest problem is that the legal framework is still not fully established. The judges are inherited from the previous time and a lot of them are corrupt. This is the most important battle that we need to win: reduce corruption, not in the administration, which is very good compared to what we had before, but the corruption of inner society as a whole. Personally, I am not afraid. I am sure that I am doing the right thing, so I am not afraid. I believe that you are either lucky or unlucky. If you are doing the right thing and you are a little bit lucky, than everything will be ok. I do not think about danger. The same was during the Milosevic period. When I wrote a book about his illegal transactions, I was not afraid. I know that the reforms will cross the interests of many people who were profiteers during the sanctions and the war, but those who are smart will transform themselves into legal market players. Those who are not, will have to leave the country or go to court. I am not thinking about them, but about the changes in the system. It is difficult but we are committed and we already have some results. We would have even better results if we had better assistance of the court system and police.
When we interviewed the Minister of Finance, he said his aim was to become a candidate country for the EU membership in 2004. This is quite short term in comparative terms. What would be the legacy that you would like to offer by that time?
I think that we have completed our major tasks for 2001 and 2002. Fortunately, the first reform that will be completed in our country is the banking reform. In the functioning of the National Bank we already made major changes. We are now developing our IT system and accounting framework. Major things like the monetary policy and exchange rate policy are already in a very good shape and we just have to make some minor changes. From 2003, my job would become quite boring.
This is a good goal, to make your job as boring as possible. It is a good sign for investors. In that case, what would be your message to our readers?
The most important message is that when you invest in Serbia you are not investing a country of 7-8,000,000 citizens, but to the gateway to the whole South-East Europe, which is a market that is hungry for all kind of products and services. The reason why this region was not developed before was because we had a problem in Serbia, called Milosevic. With the reforms we are implementing, we will become quite different, the engine of the whole region. I think that this market will produce for another two years very high profits. You cannot earn that high profit in any other part of Europe. But after two years it will become a normal market place. Our goal is to catch up with other Eastern European countries. We have a very ambitious government consisting of young people, who have energy and motivation and some more experienced people like Mr. Labus (the Deputy Prime Minister). A lot of young people who used to work abroad now come back and this is a good sign, the new generations graduating from the universities has a motivation to stay here. In two years, together with foreign investors, we can make a miracle in this country.
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V.I.P. INTERVIEWS 
