Željka Radulović: There has been clear oposition from a couple of Montenegrin banks, regarding the new banking growth criteria, and limits to the growth imposed by the Montengrin Central bank.
What is your view on this, and do you find that the Central bank measures were just case?

Jan-Peter Olters: A central bank’s role is, of course, very different from that of private banks — and their respective objectives are not always necessarily congruent. The central bank needs to guarantee the soundness of the banking system and ensure the rights of depositors. And for this reasons, it is not a surprise — and, indeed, very welcome — that the CBCG is considering measures to dampen private sector credit growth at this point in time and, in so doing, seek to improve the soundness of banks operating in Montenegro.
With annual private sector credit growth rates of about 190%, Montenegro’s loan volume has grown much faster than anywhere else in the world — and this despite an already relatively high degree of financial intermediation, which is comparable to that of countries which higher per capita GDP figures and a longer tradition in modern banking.
In a somewhat over simplified way, commercial banks’ profitability is a function of the interest-rate differential between their assets (loans) and liabilities (deposits), with bank shaving to rely increasingly on their own borrowing to underpin the current private-sector growth rates — irrespective of the increased risks to the underlying quality of their respective portfolios.
In this context, what has the central bank done? In essence, it has done four things. It has tightened definitions of prudential indicators, broadened the base for reserve requirements, defined solvency ratios as function of the banks’ annual credit growth rates, and limited credit growth in relation to the stock of credits outstanding. This will slow down credit growth (which is good for macroeconomic reasons) and require banks to have available liquidity in instances in which their credits might not be as secure as they currently think they are. That is good. An in all fairness, the measures are, by no means, drastic.
Credit growth rates of around 40%, which these measures seem to imply for 2008, will still inject considerable liquidity into a booming economy.

Željka Radulović: Some bankers claim that foreign banks operating in Montenegro might avoid the Central Bank control and supervision, while conducting commision business, and that the amount of loans given under those commision terms would not be supervised.
Is there a danger that such practice might happen, and what would be the remedy, in your view?

J-P.O.: That’s a good question, and there are several levels to this answer.
First, Montenegro is not the only country with central bank control and supervision, and even financial institutions with mother banks abroad are covered by control, supervision, and prudential ratios — only that these are exerted and risks defined by their respective central banks.
But even if this type of commission business takes place, the default risk will be borne directly by the mother bank rather than the bank operating here in Montenegro. So, from a risk perspective, this does not matter all that much. However, looking at the situation as a macroeconomist, and with a view to controlling liquidity during boom periods, this poses a problem in that the effective credit growth rates cannot be affected as effectively as desired.
The way I see the central bank’s set of measures, it is as much an instrument to limit private sector credit growth as it is a signal of its willingness to impose further measures if banks do not align the conduct of their business accordingly.

Željka Radulović: Proposed law on banks is also under big discussions. How do you look at some provisions regarding the increasing role of the Central bank, in making and executing banking legislation?

J-P.O.: Very exhaustive economic research has shown that, in the end, the economy benefits, to a considerable degree, from central banks that are protected (by law) from undue influences from the political process, from central banks that are put in charge of assuring that the purchasing power of one’s currency is maintained.
The central bank’s role is to enact measures aimed at securing price stability and confidence into the financial and banking sectors. Also in light of the issues discussed before, it is important to provide the central banks with the instruments necessary to succeed in its task, and the Banking Law is an important and well-timed step in the right direction.

Željka Radulović: New property law is also quite controversial, and political debate goes whether to allow foreigners to purchase Montenegrian real estate (land) or not, and is it good to allow them to register their newly bought estate it in Montenegrin real estate registry.
What is common European practice, and what is best solution, in your view?

J-P.O.: As I understand the law, there will not really be an important change relative to the current situation. Foreigners have bought real estate in recent years at a significant pace, and the law brings into alignment that what is already happening. With very few exceptions — I only know of one, existing EU members permit foreigners to purchase real estate in their countries, implying that this law would make this more of a reciprocal relationship.

Željka Radulović: Large foreign trade deficit is constant case in Montenegro, and increases every year, for some time. What do you think about that, and what would you suggest to the Goverment, in order to cease this problem?

J-P.O.: Given that Montenegro is euroized, a large trade deficit cannot cause financial crises, as it would be the case in countries with a fixed exchange rate, or lead to imported inflation from a depreciating exchange rate, as is the case in countries with flexible exchange rates.
Montenegro imports more than it exports because money is available from other sources, including from services (tourism) and the capital account (for example, from the sale of real estate). If — for whatever reason — this inflow of capital stopped over night, the impact would be a corresponding reduction in imports, with detrimental effects on growth rates and tax revenues, but without ripple effects on the financial market.
Good policies clearly can help, but there is no one single policy that would achieve that. First, the government can help to provide a business climate that is conducive to the development of a competetive sector of small and medium-sized businesses that compete successfully and profitably in foreign markets. This includes elements of public infrastructure and the provision with energy, this means good tax laws and the efficient, rules-based collection of taxes and duties, and this means that businesse can hire workers that have benefited from high-quality education and training.
Such a policy mix includes policies aimed at ensuring that tourism receipts will continue to materialize — by protecting those elements of the Montenegrin tourism experience that makes foreigners enjoy summers here.
So, protecting the environment, ensuring an efficient way of dealingwith waste water and solid waste, and care for cultural treasures and architectural gems, all of these policies represent ingredients into a successful policy mix that helps to prolong the period of high and sustainable rates of economic growth, and the ability to finance imports in excess of goods Montenegrin enterprises can export.

Željka Radulović: Montenegro has started implementing Interim SAA agreement with the EU. Where do you see biggest challenges and problems that might occur, and also, where are the biggest immediate benefits from implementing the Agreement?

J-P.O.: The process of EU integration requires a mix of reform commitment, endurance and determination — and it is always easy to be side tracked, to be tempted by what seems tooffer tactical gains.
There are elections on the horizon, and these tend to shorten policy makers’ time horizons. There is a regional component that, at this very point intime, is difficult to assess in relation to inherent challenges. There is constant conflict between “good politics” and “good economics”, that is, the constant need to create support and ownership within the electorate for necessary reforms that are difficult to explain and typically easy to exploit with simple, populist arguments.
But the reform process implicit in the commitments made by the government in the interim agreement is not a “test” to prove commitment, it is a process that any country has to engage in to beable to benefit from globalization and the opportunities offered by the global marketplace.
To succeed with this, the EU and other development partners, including the World Bank, offer support, both financial and technical, in an effort to have the country not only be able to deliver what it has promised but to advance the process of closing the income gap with current members of the EU.
The current process thus offers an immense potential for a successful adaptation also of economic challenges posed by globalization — while closing the still existing income gap with other countries in the EU.