Interview for "Nova Makedonija", November 1998
THERE IS NO ECONOMIC GROUND FOR DEVALUATION
At this moment, the Governor, Mr. Ljube Trpeski, is probably one of the most interesting persons to talk to, having in mind the events in the exchange offices that marked the past period and the expectations of what will happen to the denar in future. In the interview for "Nova Makedonija" the Governor talks about the reasons which caused fluctuations of the denar exchange rate, about the effects from the undertaken measures, as well as about the necessity of maintaining its stability.
In the past few weeks there was a serious pressure on the denar exchange rate. According to the analysis of the National Bank, what were the reasons for this?
Fluctuations in the foreign exchange market are usual for pre-election periods and it is not only a feature of our country. It also happens in countries with a longer democratic tradition. In the beginning there was a certain instability only on the exchange offices market, and that was in respect to a single currency - the German mark. We, in NBRM, were not very worried about it. First, the exchange offices market represents an insignificant part of the total foreign exchange market, and second, the instability was only towards one currency. However, after the first round of the elections the turbulence spread, primarily as a result of psychological factors. It had an impact on the subjects, both individuals and legal entities, who at that moment behave very rationally. If any change in the exchange rate is expected, then they try to save the part which can be saved. This results in an artificial creation of excess demand in terms of supply. When it spread to the foreign exchange market and when we noticed that some large exporters restrain themselves form selling the foreign currency on the foreign exchange market, when some other subjects are trying to settle all obligations now, although they are due at the end of the year, we decided to intervene on the foreign exchange market in order to calm down all these movements. It is usual in all countries to relax the fiscal policy in the pre-election period. The same thing happened here as well, by execution of certain payments. That led towards increase of cash in circulation above the optimum level, which created certain pressures. However, psychological factors were dominant.
Do you think that now after it is clear who won at the elections, psychological factors shall lose their significance, i.e. that the denar exchange rate shall obtain its previous level?
I think that the psychological factors will last for a while. According to the ESAF arrangement with the International Monetary Fund, denar exchange rate is a nominal anchor in the economic policy and is fixed at denar 31 to a German mark. As I have said on several occasions, we shall defend the exchange rate with all means and methods that are at our disposal, because it is one of the key conditions for fulfilling the ESAF arrangement, and I don’t want NBRM to be responsible for the possible failure of the arrangement.
As a Governor, and in general in the National Bank, were you surprised with the intensity of the demand and the duration of queuing in the banks? Was it due to the delayed intervention?
No. First of all, if there hadn’t been any statements which caused avalanche in people’s desire to purchase foreign currency, if the instability had remained in the exchange offices market , we wouldn’t have intervened. We are interested in the inter-bank foreign exchange market, and there supply and demand were balanced. However, when the economic subjects started by large to avoid selling foreign currency, (whereas everybody wanted to purchase foreign currency) it became obvious that due to those statements everybody expected devaluation.
Did the intervention on the exchange offices market give the expected results and which steps are you going to undertake in future in order to prevent similar situations?
Yes, as we expected, the interventions in the foreign exchange market very quickly "exhausted" the excess liquid assets, i.e. decreased currency in circulation which resulted in calming down the tensions in the market and bringing the denar down to the level of twenty days ago. Just for illustration, through the interventions of the National Bank during the past several days, currency in circulation decreased by more than denar 400 million, and the denar exchange rate reverted to the level of 31.5 - 31.8 denar to the German mark. We think that there is no need of further intervention of the National Bank on the market, and that in future it will not be necessary to undertake any particular steps, because most of the factors which caused the oscillations in the denar value are with one-time impact, which has already been exhausted.
It is often stated that the share of cash in circulation is one of the reasons for such fluctuations. What is its share, is there an excess money supply and what does the National Bank do in order to decrease the percentage of cash for which certain measures were announced several months ago?
The high level of cash in circulation is really a serious problem in the Republic of Macedonia. Participation of currency in circulation in the money supply M2 is constantly maintained at the level between 45 and 50%, which is 10 to 15 percentage points above the optimum and above the most appropriate participation in the most developed countries in transition. The danger of the too high level of cash in circulation was expressed in the recent movements in the foreign exchange market, when the pressure came as a result not only of the increased total amount of money, but also because of the structural change in the framework of the money supply in direction of decreasing the amount of demand deposits (current and giro accounts of legal and natural persons) against the increment of currency in circulation. The measures for overcoming this situation are well known: in short term it is necessary to revise the existing legislation which covers cash operations, and in long term, banks will have to increase the supply of modern non-cash payment instruments.
Parliamentary elections brought change in the balance of power in the Parliament. In your view, what is the role of the Central Bank in the newly created situation?
Just what it was before, independent, expert institution, which should have maximum rights, but also appropriate responsibility in conducting the monetary policy and maintaining denar exchange rate stability. Empirical experience shows that the most independent central banks, such as those in Switzerland and Germany, are most efficient in their operations and they best accomplish their ultimate objective - maintaining stable internal and external value of the domestic currency. Of course, that does not exclude, but on the contrary, it includes the cooperation of the Central Bank with the Government, i.e. the Ministry of Finance. Consistency of the overall macroeconomic policy, which includes fiscal, monetary, foreign exchange policy, as well as the wage policy is a necessary precondition for their successful and efficient implementation. Otherwise, neither monetary nor fiscal policy alone, can give optimum results. Coordination and cooperation are necessary, of course with complete respect of the expertise and competence of both institutions. I am strongly convinced that such cooperation and correct relationship will continue in future, because stable macroeconomic condition and higher rates of economic growth are of our mutual interest.
The standpoint of the parties which will receive the mandate for constituting the Government with respect to the inflation level and the denar exchange rate, is different from the present economic policy. What is the attitude of the National Bank of the Republic of Macedonia regarding these issues?
Two-digit inflation rates would rather impoverish the people instead of leading to some prosperity. At least that is what the experiences from the economic history and present show. Therefore, I think that most optimum conditions for enhanced economic growth will exist only if we succeed in maintaining low, stable, single-digit inflation. Whether we will approach the minimum or the maximum limit, or we will be in the middle, as the present target, is an empirical question which depends on several factors: the phase of the economic cycle in which we currently are, world economy growth, investments volume and capital inflows, productivity growth, speed of enterprises restructuring, etc. Inflation rate is not something that can be precisely forecasted, but there should be understanding and respect of what has been accepted almost as a consensus among the world most famous macroeconomists - the low, stable and predictable inflation rate creates the best macro-ambiance for accomplishing dynamic economic growth.
Recently you have had a meeting with the president and the vice president of VMRO-DPMNE, Mr. Ljupco Georgievski and Mr. Boris Stojmenov, who publicly declare that one of the first problems they will deal is whether this denar exchange rate is long run equilibrium rate, which, according to them, is now being overvalued. What is the attitude of the National Bank?
One should make a difference between certain euphoric statements of any of the parties in the pre-election campaign and afterwards, when it faces the real problems and the actual situation. This again, is not a feature only of our country. Also in countries with much longer tradition, leaders and parties promise one thing, and what they realize is something completely different. I believe, and the meeting with the president and the vice resident of VMRO-DPMNE showed that we have many common standpoints. First, the necessity of continuing the arrangements with the IMF and the World Bank, because we agree that without them it would be very difficult for Macedonia to continue with the reforms, to maintain its macroeconomic stability in the country and to service its external debt. Therefore, if there is determination to continue with the arrangements, it means determination to continue with the macroeconomic stability in the country and to continue with the reforms. That means continuity in conducting the economic policy in future.
Is there a separate provision in our legislation which regulates the issue of devaluation, and which institution announces the devaluation, the National Bank or the Government?
Monetary policy is jointly conducted by the Government and the National Bank. The Parliament of the Republic of Macedonia also participates with an adoption of a document regarding the balance of payments policy. Thus, it can not be separated. There must be a coordination. Therefore, the arrangements we sign with the IMF are signed both by the Governor and the Minister of Finance. Thus, responsibility is mutual, although the Constitution and the National Bank of the Republic of Macedonia Act define that the National Bank takes care of price stability and denar exchange rate stability.
What happens in the case of disagreement between the National Bank and the Government regarding these issues?
In case of a disagreement, the Governor explains his attitude and the reason for disagreement with the Government in front of the Parliament. In parliamentary democracies, since the Government has the majority of the Parliament, the Governor resigns, but he states the reasons for his resignation in the public.
According to the analyses of the National Bank, are there any assumptions which would lead to change in the denar exchange rate?
No. There are no assumptions in the economy that will cause devaluation of the denar exchange rate, as they existed in the first semester of the last year. There is an increase in the export, unlike last year when there was a decline, we have a low inflation rate, we have growth in the foreign exchange reserves. This means that the three key factors, which could possibly force us to think of a devaluation, do not exist. Then why would we undertake such a step? On the other hand, if during the course of the next year we receive those million or billion dollars, we will face the problem of appreciation of the denar exchange rate.
But also in the beginning of this year it was expected that the volume of foreign investments will be so large, so that the question will be to maintain denar exchange stability, i.e. not to increase its value. But in practice, there was a completely reverse situation - the denar started to lose its value. Why?
The volume of foreign investments is not as large as we expected it to be, because the largest investments which were supposed to come from the European Investment Bank have not been received yet. Today (the interview was held on Thursday) I have an information that the funds for road construction will be disbursed in the beginning of December. All bureaucratic procedures in the EU have been surpassed. Thus, the largest portion of the funds, which would mean increase of the supply, has not arrived yet.
Can the cooperation with the IMF be put in question? There is a widely spread opinion in the public that Macedonia very easily accepts all that they propose. What could that mean for the future of the country?
The meeting with Mr. Georgievski and Mr. Stojmenov encouraged me that the arrangements will continue. In the discussions that we had, I tried to emphasize how important it is for the country to continue the arrangements. If we terminate them, we will very quickly find ourselves in the situation of Russia or some other East European countries. We are regarded as a country which fulfills all obligations arranged with the international financial institutions. We are also regarded as a country which during the negotiations very hard comes to the final result, but once it is agreed, it is undoubtedly fulfilled. Therefore, speculations that we very easily and quickly accept the arrangements with the IMF are incorrect. Those are very difficult negotiations, which end up with a compromise between the two negotiating parties. That gave the results. Achievements are also obvious in the macroeconomic stability issue, and are recognized by the whole world. They are better recognized by the world than by ourselves.
High commercial banks’ interest rates are an obstacle for more intensive investment activity. Which are the preconditions for making them more accessible for the economic subjects?
The high price of the capital in Macedonia is a widely elaborated issue, and it is impossible to find quick and efficient solution, especially in the market economy which we chose. This is especially related to the objective factors which determine the level of interest rates, such as the insufficient assets supply caused by the deteriorated confidence in the financial institutions, but also the low income level, which doesn’t give much space for saving. We need to act in this direction, but it is impossible to achieve significant results in a short term. What can and should be changed in a short term is the subjective factor, such as the court inefficiency in solving financial disputes. Bankers have been pointing out this problem for many years, but it has not been solved yet, which acts in direction of increasing the bank premium which the banks include in the capital price. Of course, financial institutions should not restrain themselves from this process, because in their calculations there is certainly some space for decreasing the operational expenses and a certain decline in the interest rates on this basis. In the end, I expect the foreign capital inflow which arrives with increased dynamics during this year, to be even further intensified in the following years, which would act in direction of supply of assets at a lower price.