A central bank’s role is, of course, very different from that of private banks—and theirrespective objectives are not always necessarily congruent. The central bank needs toguarantee the soundness of the banking system and ensure the rights of depositors. Andfor this reasons, it is not a surprise—and, indeed, very welcome—that the CBCG isconsidering measures to dampen private sector credit growth at this point in time and, inso doing, seek to improve the soundness of banks operating in Montenegro. With annualprivate sector credit growth rates of about 190 percent, Montenegro’s loan volume hasgrown much faster than anywhere else in the world—and this despite an alreadyrelatively high degree of financial intermediation, which is comparable to that ofcountries which higher per capita GDP figures and a longer tradition in modern banking.In a somewhat oversimplified way, commercial banks’ profitability is a function of theinterest-rate differential between their assets (loans) and liabilities (deposits), with bankshaving to rely increasingly on their own borrowing to underpin the current private-sectorgrowth rates—irrespective of the increased risks to the underlying quality of theirrespective portfolios.In this context, what has the central bank done? In essence, it hasdone four things. It has tightened definitions of prudential indicators, broadened the basefor reserve requirements, defined solvency ratios as function of the banks’ annual creditgrowthrates, and limited credit growth in relation to the stock of credits outstanding. Thiswill slow down credit growth (which is good for macroeconomic reasons) and requirebanks to have available liquidity in instances in which their credits might not be as secureas they currently think they are. That is good. An in all fairness, the measures are, by nomeans, drastic. Credit growth rates of around 40 percent, which these measures seem toimply for 2008, will still inject considerable liquidity into a booming economy.

Some bankars claim that foreign banks operating in Montenegro might avoid Centralbank control and supervision, while conducting commision business, and that the amountof loans given under those commision terms would not be supervised. Is there a dangerthat such practice might happen, and what would be the remedy, in your view?

That’s a good question, and there are several levels to this answer. First, Montenegro isnot the only country with central bank control and supervision, and even financialinstitutions with mother banks abroad are covered by control, supervision, and prudentialratios—only that these are exerted and risks defined by their respective central banks. Buteven if this type of commission business takes place, the default risk will be bornedirectly by the mother bank rather than the bank operating here in Montenegro. So, froma risk perspective, this does not matter all that much. However, looking at the situation asa macroeconomist, and with a view to controlling liquidity during boom periods, thisposes a problem in that the effective credit growth rates cannot be affected as effectivelyas desired. The way I see the central bank’s set of measures, it is as much an instrumentto limit private sector credit growth as it is a signal of its willingness to impose furthermeasures if banks do not align the conduct of their business accordingly.

Proposed law on banks is also under big discussions. How do you look at someprovisions regarding the increasing role of Central bank, in making and executingbanking legislation?

Very exhaustive economic research has shown that, in the end, the economy benefits, to aconsiderable degree, from central banks that are protected (by law) from undueinfluences from the political process, from central banks that are put in charge of assuringthat the purchasing power of one’s currency is maintained. The central bank’s role is toenact measures aimed at securing price stability and confidence into the financial andbanking sectors. Also in light of the issues discussed before, it is important to provide thecentral banks with the instruments necessary to succeed in its task, and the Banking Lawis an important and well-timed step in the right direction.

New propery law is also quite controversial, and political debate goes whether to allowforeigners to purchase Montenegrian real estate (land) or not, and is it good to allowthem to register their newly bought estate it in Montenegrian real estate registry. What iscommon European practice, and what is best solution, in your view?

As I understand the law, there will not really be an important change relative to thecurrent 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 fewexceptions—I only know of one—, existing EU members permit foreigners to purchasereal estate in their countries, implying that this law would make this more of a reciprocalrelationship.

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

Given that Montenegro is euroized, a large trade deficit cannot cause financial crises, as itwould be the case in countries with a fixed exchange rate, or lead to imported inflationfrom a depreciating exchange rate, as is the case in countries with flexible exchange rates.Montenegro imports more than in exports because money is available from other sources,including from services (tourism) and the capital account (for example, from the sale ofreal estate). If—for whatever reason—this inflow of capital stopped over night, theimpact would be a corresponding reduction in imports, with detrimental effects ongrowth rates and tax revenues, but without ripple effects on the financial market. Goodpolicies 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 thedevelopment of a competetive sector of small and medium-sized businesses that competesuccessfully and profitably in foreign markets. This includes elements of publicinfrastructure 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 workersthat have benefited from high-quality education and training. Such a policy mix includespolicies aimed at ensuring that tourism receipts will continue to materialize—byprotecting those elements of the Montenegrin tourism experience that makes foreignersenjoy 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 toprolong the period of high and sustainable rates of economic growth, and the ability tofinance imports in excess of goods Montenegrin enterprises can export.

Montenegro has started implementing Interim SAA agreement with the EU. Where do yousee biggest challenges and problems that might occur, and also, where are the biggestimmediate benefits from implementing the Agreement?

The process of EU integration requires a mix of reform commitment, endurance, anddetermination—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 shortenpolicymakers’ 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 conflictbetween “good politics” and “good economics”, that is, the constant need to createsupport and ownership within the electorate for necessary reforms that are difficult toexplain and typically easy to exploit with simple, populist arguments. But the reformprocess implicit in the commitments made by the government in the interim agreement isnot 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 WorldBank, offer support, both financial and technical, in an effort to have the country not onlybe able to deliver what it has promised but to advance the process of closing the incomegap with current members of the EU. The current process thus offers an immensepotential for a successful adaptation also of economic challenges posed byglobalization—while closing the still existing income gap with other countries in the EU. - Source: By The World Bank