Dimitar Bogov: Republic of Macedonia - celebrating monetary
independence
Opening address by Mr Dimitar Bogov, Governor of the National Bank of the Republic of
Macedonia, at the gala event on the occasion of the 20th anniversary of the monetary
independence of the Republic of Macedonia, Skopje, 26 April 2012.
* * *
Honorable President of the Parliament of the Republic of Macedonia,
Honorable fellow Governors of central banks,
Distinguished guests, ladies and gentlemen,
Let me wish you all a very warm welcome and thank you for accepting our invitation to attend
this gala event on the occasion of our landmark anniversary - twenty years of the monetary
independence of the Republic of Macedonia.
On this day, April 26, we recall the numerous challenges that we faced, the numerous
difficulties we have gone through in the past twenty years exactly.
On this day, we are reminded that the beginnings were not easy and that those beginnings
emerged in a period of, I can say without false exaggeration, huge enthusiasm of all
individuals involved in creating our own independent state with all attributes that this state
should have.
In this reminiscence of the persons who were involved in the monetary independence, I
especially feel the need to point out the name of the first Prime Minister of the independent
Republic of Macedonia, the academician Nikola Kljusev, who played one of the leading roles
not only for the monetary independence, but also for many other decisions of that time,
important for the completion of statehood. On his initiative, on December 19, 1991, the
Government adopted a Decision which obligated the National Bank to start printing value
coupons. This Decision, adopted in greatest secrecy, was a legal basis for all operational
actions that allowed the new currency, the Denar, to be presented to the public on April 26,
the following year, 1992. On this day, also on the initiative of the academician Kljusev the
systemic laws were adopted, as well as the document on the Anti-inflationary program,
which, unfortunately, did not survive the fall of his Expert Government.
On this day, besides recollecting the past, we are called to look towards the future. Here we
look at the importance of low inflationary expectations for the efficiency of the economy and
the role of the National Bank in maintaining these expectations. In fact, academician Kljusev
had devoted his entire scientific work to the issue of efficiency of economic policies.
For the central bank, as well as for the commercial banks that the central bank closely
cooperates with, basically there is only one true treasure on which the effectiveness of its
policies is based and that is the confidence of the public. It is impossible to imagine a stable
bank without having to imagine the confidence of citizens who are its customers. Also, it is
impossible to imagine confidence in a central bank without simultaneously having confidence
in its objectives. Consequently, the essential question for the monetary independence comes
down to whether it contributed to building confidence in the specific context in which it was
accomplished.
The answer to this question in the last fifteen out of the twenty years that have passed since
the monetary independence is an unambiguous YES. Even though we lost a lot of effort in
dealing with the consequences of premature abandonment of the said Anti-inflationary
program, the National Bank has been successful for fifteen years in achieving its main
objective - maintaining price stability.
Stable exchange rate is an intermediate objective for achieving the main objective. The
interest rate on the main instrument of the National Bank is an operational signal that we are
truly determined to maintain the stable exchange rate. Of course, there were and there will
be speculations on the currency market, as there were and there will be debates, to some
extent caused by partial economic interests, regarding the overall structure of the monetary
policy. The former are an integral part of the market economy, and the latter are part of the
public debate. The National Bank has the capacity to respond to a speculative attack on the
exchange rate and at the same time it is an active participant in theoretical debates and
empirical studies.
For example, we successfully dealt with three major attacks on the Denar exchange rate, in
the spring of 2001, in the autumn of 2004 and in the spring of 2009, although these attacks
were caused by quite different reasons. With this action we justified the confidence of
citizens, the confidence that is the greatest treasure, the greatest reserve of the National
Bank.
Also, the careful study of economic theory leads to the perception that the conditions under
which the weakening of the domestic currency would lead to improved net exports are not at
all present in the Republic of Macedonia. The increased sales of Macedonian goods and
services abroad, but at lower prices expressed in Euros, would not lead to foreign exchange
inflows, which could offset the more expensive imports of energy and machinery. In the
imports of the latter, we depend almost exclusively on the world rather than on the domestic
prices of production, so the result could be even worsening, instead of improving the balance
of goods and services. To the same end are the different, but more emphasized arguments
based on empirical studies: the competitiveness of the Macedonian economy is not reduced
and the research of the effective exchange rates continuously shows their adequacy.
This policy of stable exchange rate has caused the inflation in the Republic of Macedonia in
the last fifteen years to average 2.1 percent, versus 1.9 percent in the countries of the
Eurozone. With a difference of only 0.2 percentage points, the Republic of Macedonia is
among the most successful countries in transition.
In this context, it is worth emphasizing one more comparison from the past fifteen years. The
Republic of Macedonia has avoided the continuous appreciations of several years that during
the crisis were followed by depreciations, a cycle to which the countries of the region of
Central and Eastern Europe with fluctuating exchange rates had been exposed to. Thus we
avoided the illusion of increased productivity - an illusion that these countries had to pay for
in the crisis years.
Given this background of successful monetary independence and the Denar as a means for
building confidence, I believe it is fair to point out that in the past fifteen years, the attracting
of savings in Denars and the impartial and rigorous channeling of those savings to the most
efficient and most effective economic projects by the commercial banks have also been
achieved to the extent possible.
This "to the extent possible" is partly a result of the trauma caused by the numerous
devaluations of the domestic currency in the not so distant past, when savings became
almost worthless. But this past means that in the previous fifteen extremely successful years
for the monetary policy, there is an expected, though irrational stigma on the Denar, which
however becomes rational because it is rewarded. In other words, depositors believe that
they need very high nominal interest rates in Denars, in order to have a real return on
savings, which leads to high interest rates on loans. This phenomenon was not and is not a
result of the mistrust in the banking system. Mistrust of depositors comes from the fear that
due to possible devaluation followed by inflationary transmission effects, saving in Denars
would be insufficiently compensated if interest rates on savings deposits in Denars come too
close to the interest rates on deposits in Euros.
The stability of the exchange rate which established the idea that price stability is a public
good one cannot live without, is the reason why depositors are no longer so much under the
influence of this phenomenon. The latest data on the increased saving in Denars, compared
to saving in Euros, point to this conclusion.
The expectation that the stable exchange rate level will be maintained simultaneously
indicates that the difference between real interest rates in Denars and real interest rates in
Euros continues to decrease gradually, certainly without any of them remaining on negative
territory for a longer time. The National Bank will continue not to hesitate to intervene in the
foreign exchange market and increase the interest rate on the main instrument which
represents an operational signal. Through these policies the National Bank confirms its
capacity and institutional determination. Market participants recognize this successful
defense of the exchange rate in the past fifteen years, although in a short run any change
may cause, through the transmission effects, only temporary increase of the nominal, and
thus of real interest rates in the economy.
A logical consequence of all this is that a possible reflation in the Eurozone means that the
Republic of Macedonia will not become an isolated island doomed to disinflation and, vice
versa, that if the Euro continues to prove effective in delivering low inflation in the Eurozone,
in the Republic of Macedonia internal depreciation will be the preferred course of adjustment.
The differences between inflation rates in the Republic of Macedonia and the Eurozone will
remain temporary and limited.
In fact, this marks the success of the stable exchange rate as an intermediate target of the
monetary policy which consists of the aforementioned difference of 0.2 percentage points
between the inflation in the Republic of Macedonia and the inflation in the Eurozone. In the
long run, this enables economic agents to have more definite expectations about the general
price level and denotes support to the economic environment.
In such monetary policy setting it should be noted that the National Bank, as a public
institution, constantly needs to cooperate with the Government without undermining the
autonomy of any of these two institutions. From the perspective of the National Bank, this
means that the Government is trying to anticipate the policies that we implement to maintain
the level of the exchange rate and it takes them into consideration when adopting the budget.
It is clear that the National Bank and the Government may adopt essentially good decisions
in their respective spheres of action if they cooperate even during the discussions which
precede the decisions.
The cooperation with the Government would also be in terms of creating conditions for the
social dialogue to take into account the challenge we face in conducting the monetary policy.
This actually means that the inflationary pressures which in themselves would result in faster
development of the domestic economy, as well as more positive output gap compared with
the countries of the Eurozone, would also lead to more pronounced interaction with the
increase in unit labor costs. The perception of close coordination between the Central Bank
and the Government in dealing with this challenge would mean that both public institutions
are aware of the need to adjust to the conditions that the maintenance of price stability
through the exchange rate brings. This adjustment would prompt the Government, through
dialogue with social partners, to advocate a moderate growth of wages, i.e. wage growth
which will take into account productivity in both the tradable and non-tradable sectors. This
would lead to increased employment, while simultaneously improving the competitive
position of enterprises, which would alleviate the emergence of imbalances in the economy
as a whole.
Finally, I would add that we, at the National Bank, have learned a lot from the mistakes that
economic policy-makers have done in the past. But, as confirmed by the history of our
institution, monetary independence is perhaps the decision that best helped us to contribute
to the improvement of the efficiency of the economic policies, and thus improve the living
standard generally, in a state-making, institutional, economic and practical way.
Long live this great anniversary!