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Serbia: Parties Tussle Over Leadership of Central Bank

14 12 2006  As yet another governor faces a politically-inspired putsch, calls grow for bank to be made more truly independent and also more accountable.

By Vesna Hadzivukovic in Belgrade (Balkan Insight, 14 Dec 06)

Radovan Jelasic, current governor the National Bank of Serbia, is likely to become the third governor since 2003 to be forced from office before the end of his term.

On November 10, as Serbia’s outgoing parliament passed a Constitutional Law setting out a roadmap for the country’s constitutional transition, it prescribed the election of a new bank governor to take place at the next parliament’s opening session.
 
Jelasic clings to his job, claiming he is the victim of a political carve-up. When the decision to choose a new governor was announced in parliament, the reformist G17 Plus party, to which Jelasic belongs, accused the big parties, including Prime Minister Vojislav Kostunica’s Democratic Party of Serbia, DSS, and the opposition Democratic Party, DS, of targeting the governor in a “dirty political deal”.
 
Serbian politicians agree, telling Balkan Insight that backroom deals played a direct part in determining the future of the bank’s leadership.
 
However, others are questioning the governor’s own political ties and proposing major changes to make the institution more accountable. They also question the present nature of the bank’s independence, with one former governor calling for an overhaul of the bank’s management structure.
 
Experts are divided about the legality of Jelasic’s early dismissal, though Slobodan Vucetic, president of the constitutional court, defends the move. “When there is a change in constitutional systems, the new founders, through the Constitutional Law, prescribe a general re-election of all state organs,” he said. “The interruption of public officials’ mandates is lawful. It represents usual practice when systems change.”
 
Jelasic disputes this. “The excuse that a new constitution equals a new Serbia does not hold water,” he said. “No other institution – only the National Bank of Serbia – is explicitly mentioned in the Constitutional Law. This is reason enough for me to conclude that this is the result of a political deal.”
 
Although the governor did not single out individual parties for blame when he spoke to Balkan Insight, he later accused the DSS and DS of “trading” his position in an appearance on B92 television.
 
One politician who took part in the DS-DSS negotiations that preceded adoption of the Constitutional Law confirmed to Balkan Insight that a deal over the governor’s post did take place.
 
He said the two parties bargained away Jelasic’s position in the interests of forming a coalition with a third party after the next election. “Jelasic must go in order to clear as much room as possible for bargains with an eventual third partner,” he said.
 
G17 Plus performed well in the last election, winning several cabinet posts, including that of finance minister, held until recently by Mladjen Dinkic, the G17 Plus leader and himself a former bank governor.
 
But the party’s fortunes have since faded and in next year’s elections it may struggle to cross the five-per-cent electoral threshold needed to enter parliament.
 
“Even if G17 Plus manages to pass the threshold its position will certainly be much weaker than before,” the same source told Balkan Insight.
 
“The maximum that Dinkic can count on is one business-related ministry; that is why even the former minister of finance is ready to send Jelasic down the river,” he continued.
 
The row over Jelasic’s future has cast light on the central bank and raised fresh questions about its independence from politics.
 
“The work of the current governor cannot be described as politically independent,” said Slobodan Milosavljevic, president of the Serbian Chamber of Commerce, a senior DS official.
 
“As a member of a political party, G17 Plus, he was elected from their list and at their behest… the governor was dominated by the finance minister [Dinkic] who at the same time was his party boss.”
 
While horse-trading over senior posts is routine in Belgrade, even some insiders who have benefited from these political carve-ups now complain that the practice has become too extreme.
 
“Our parties see the seizure of power as an opportunity to divide the plunder - one party gets one sector, the other gets another, and so on,” said Branko Pavlovic, a former chief of Serbia’s privatisation agency who now consults public sector trade unions. “They are turning the state assets into a feudal turf war.”
 
G17 Plus has been no exception. The party sought and received leading positions in the fields of finance, banking and securities. Its trophies include the finance ministry, the bank governorship, the post of securities and exchange regulator and the deposit insurance agency, amongst others.
 
Jelasic has never denied that his route to the governorship of the bank ran through G17 Plus. His initial post at the bank was deputy governor under Dinkic. He left office with Dinkic in 2003 when the DS, flexing its power, kicked them out and installed a loyalist, Kori Udovicki. Her tenure lasted only a year, however, when another shift in political power brought Jelasic to the fore as governor.
 
However, as governor, Jelasic has sharply criticised profligate spending authorised by the finance ministry under his party colleague and former boss at the bank, Dinkic. Recently the governor has argued in his frequent public appearances that his governorship must be judged by its record, not his political affiliation.
 
Yet here, too, Jelasic has run into controversy. On his watch, Serbia’s monetary policy has been described as overly restrictive. A primary focus of criticism is the crown jewel of the governor’s policy: the accumulation of substantial reserves in the central bank.
 
In November, Serbia’s cash reserves officially topped 11 billion US dollars, an overestimated figure according to some critics. The cash designated as “reserve” is not a single amount, but rather the sum of several kinds of reserve. Some 38.3 per cent of the total is not Serbia’s at all but the obligatory currency deposits of commercial banks, held by the National Bank of Serbia. The central bank’s own reserves are considerably smaller, around 4 billion US dollars, while the rest belongs to the state.
 
Four times in the past 12 months, Jelasic has raised the rate of deposits required of commercial banks, attempting to discourage overly aggressive lending.
 
Yet household lending continues to grow rapidly, despite of high interest rates, while banks, says Bozidar Djelic, the former finance minister who now heads operations in south-east Europe for the French bank Credit Agricole, through the first three quarters of 2006 posted a collective 53 million euros loss.
 
To minimize the damage, banks with foreign majority offered to investment hungry companies a way around – to borrow directly from their mother banks, which contributed to the growth of Serbian debt up to 18.5 billion US dollars.
 
Kori Udovicki, Jelasic’s predecessor as governor, currently runs a Belgrade think thank, the Foundation for the Advancement of Economics. She says cross-border lending has “skyrocketed” and that “attempts to bring it under control through the appreciation of domestic currency is like trying to lift a burden by pushing the short end of the lever”.
 
Another major central bank success cited by Jelasic is the taming of inflation, which in recent years threatened to reach double figures. Recent projections indicate it will fall below the nine-per-cent-level planned in 2006. But Jelasic is not immune from criticism here, either.
 
“The central bank is in the uncomfortable position of choosing between higher inflation and currency appreciation, and neither choice is brilliant,” said Djelic.
 
He argues that public spending cuts are a more effective tool for fighting inflation than monetary measures alone.
 
Jelasic remains an outspoken advocate of fiscal austerity. Yet his rivals assert that central bank policy was tailored to enable Dinkic and the government to avoid painful sacrifices in the months before coming parliamentary elections.
 
The appreciation of domestic currency, which has stimulated growth in imports and brought in higher revenues from excise and sales taxes, may in fact enable the finance ministry to end the fiscal year with a small budget surplus.
 
Suspicions that there is too much political collusion between the supposedly independent governor and the government has fuelled calls for greater transparency in bank policy-making.
 
Jelasic disagrees, saying the Law on the National Bank of Serbia is “good enough” and that “the level of independence is affected more by who the governor is, and how he governs, than any systemic faults”.
 
But Udovicki is leading calls for a new policymaking system, based on a committee, which will limit governor’s omnipotence.
 
“The Law on the National Bank of Serbia gives the governor all the attributes of independence but not the accountability,” she said. “There is no complex internal system of management control that can prevent the domination of a single interest group.
 
“The governor alone decides, for example, on the closure of banks. Likewise, there is a monetary board to determine monetary policy, but the members of that board are nominees of the governor.”
 
With such extraordinary powers and relatively little accountability, it is no wonder that political parties compete to control the post.
 
Yet while the governor is seen as omnipotent, he also remains impotent as a tool of political interests larger than himself, noted Jurij Bajec, a Belgrade economist.
 
 “Aside from formal changes in the law we need a political consensus that the central bank should be a strictly professional, non-partisan, expert institution which, with the governor, runs a fully independent policy,” said Bajec.
 
Vesna Hadzivukovic is a freelance journalist and the executive director of Southeast, a Belgrade-based business consultancy. Balkan Insight is BIRN`s online publication.