Colin Barraclough Only two years ago Nicholl pulled off a spectacular - and unexpected - triumph in the war-torn country when he introduced a new national currency and lent it strength by pegging it to the deutsche mark. In less than two years, however, German money will give way to the euro, and Bosnia’s fledgling konvertibilna marka must stand on its own. No decision has been made yet on whether the euro will be circulated in Bosnia and, in any case, the unfamiliar currency would not have the neat 1-to-1 exchange rate that the deutsche mark has supplied.
The challenge follows what has already been a remarkable bit of sleight of hand. In 1998 Nicholl fashioned Bosnia’s marka in place of a mishmash of wartime scrip and the former Yugoslav currencies. After matching every new bill with a deutsche mark equivalent inside the vaults of the bank’s Sarajevo headquarters and choosing a design that resembled the German currency, he released the marka to a wary public. Against all expectations, it became a runaway success. The three regional currencies that once circulated have disappeared, and the marka and deutsche mark are accepted interchangeably everywhere.
Nicholl, 56, a former deputy governor at the Reserve Bank of New Zealand, has been running Bosnia’s central bank since November 1997, as part of the West’s efforts to resuscitate the country. The Dayton peace agree-
ment, which ended Bosnia’s 1992-'95 war, sanctioned the creation of a central bank. It also mandated that for the first six years of operation, the bank governor should not be a citizen of Bosnia or of a neighboring country.
Serge Robert, who helped craft and push the legislation creating the bank, opened the institution in August 1997 before returning to his native France. Nicholl took over just three months later, on loan from the International Monetary Fund. “I’d just joined the IMF when they asked me if I wanted to be governor of a central bank,” Nicholl says. “Only when I readily agreed did they tell me it was Bosnia. It was difficult here at first.”
Nicholl has had to build the central bank almost from scratch. From the start he believed that it had to be visible to each of Bosnia’s ethnic groups. He set about opening branches throughout the country: in the Muslim-dominated capital, Sarajevo; the Serb-populated towns of Pale and Banja Luka; the Croat and Muslim city of Mostar; and, since August, the Muslim and Serb town of Brsko.
Working out of the bank’s bullet-scarred headquarters, Nicholl knows that the real power in Bosnia is held not by the token national government but by the country’s two independent political entities, the Muslim-Croat Federation and the Serb Republic. Deep distrust between and within the two makes all decision making difficult. “It’s been extremely frustrating most of the time but never dull,” he says, relaxing for a moment in his airy wood-paneled office on Sarajevo’s Marshall Tito Street. “The only way to work is by trying to keep the politics out of economics.”
In Bosnia, however, politics touches everything. Shortly after his arrival Nicholl successfully persuaded Serbian politicians to allow the bank’s research department to move from Pale (the Bosnian Serbs’ wartime headquarters) to Sarajevo. As a result, the staff from the Serbian town would have been able to travel to the Muslim-controlled capital for the first time since the war broke out in 1992. A week after the move, however, a landslide cut off the Pale-Sarajevo road; ten months later it is still blocked, and each of the two entities insists that the other is responsible for the road’s clearance. “That’s Bosnia for you,” says Nicholl with a shrug.
The country’s financial system, too, remains volatile. Bosnia’s two constituent entities still regulate their own banks. And they do a lousy job of it. Fourteen banks have collapsed since the end of the war in 1995, some amid accusations of high-level corruption. Sarajevo-based BH Banka, for instance, went bust two years ago owing $15 million to foreign embassies and international organizations. In early August Bosnian police charged the bank’s owner, former foreign trade minister Alija Delimustafic, with fraud and abuse of his position.
Though these episodes certainly undermine confidence in the economy and, by extension, the currency, they don’t fall within Nicholl’s purview. Under Bosnian law the central bank acts only as a currency board, holding the national account of the currency in circulation. It issues no credit, can lend no capital either to the government or to state-owned or commercial banks and is not permitted to be a lender of last resort. “If government ministers ask me for a loan, I have to say, ‘I’m sorry, Mr. Minister; I can’t do that,’” Nicholl says. “There are times when you know a quick injection of cash could help the country, but the law is very clear.”
It hasn’t always been easy simply guarding the currency, and mistakes are all too visible. In one case, central bank representatives did provide credit to a state-owned institution, and Nicholl had to step in to freeze the borrower’s assets. As a result, the marka briefly breached its 1-to-1 relationship with the deutsche mark. “In the first year the central bank had no capital, no buffer at all,” says Nicholl, adding that occasional violations of the currency board were “very embarrassing.”
As confidence in the currency increases, however, Nicholl has been able to withdraw Dm800 million ($359 million) from the economy, sending it back to Berlin in preparation for the removal of all German currency in 2002.
Daily life in Bosnia is considerably less dangerous than it was just after the war. Roads and other paved surfaces are considered safe - though perhaps 1 million land mines still lie hidden underground there. Although a semblance of normality has returned, Bosnian society remains deeply divided: decision making is interminable and every move politicized. In such an environment Nicholl believes his nationality has been a blessing. “I’d never lived in Eastern Europe, never been to Bosnia,” he says. “That’s definitely helped me. Bosnians tend to judge people by their label, or by the attitude their country took during the war. Luckily, New Zealand doesn’t really register.”
His objectivity was undoubtedly crucial when setting up the currency. The design of the marka had to be acceptable to all of Bosnia’s ethnic groups, but nationalist politicians bickered endlessly over the alphabets used (Serbs read Cyrillic, the Croats and Muslims use the Latin alphabet) and the national figures chosen to decorate the bills. “What a process,” sighs Nicholl in recollection. “They started with the extremists. As an example, the Serbs wanted to feature Gavrilo Princip [the nationalist Serb whose assassination of Austro-Hungarian Archduke Franz Ferdinand helped set off World War I]. After a while, we managed to move them on to writers. In the end, we had to impose a design.” The result is two different versions of the marka: one with Cyrillic writing on top and Latinate below, featuring Serb literary heroes; the other with Latinate script at the top and Cyrillic below, displaying Muslim or Croat writers. Once he had made his selection, Nicholl says, “I flew to Paris with the final choice and simply had them printed.”
Deciding when to discuss and when to impose a decision is a delicate balancing act that will continue to fill Nicholl’s remaining years in Bosnia. The bank governor’s post will convert to Bosnian leadership in 2003. Nicholl’s long-term aim is to create an institution solid enough to survive the transition. That’s no easy task. If he implements drastic changes now, the bank will surely crumble along partisan lines upon his departure; if he offers too few guidelines, the endless discussion and debate will just as surely halt all progress.
Wrangling among the country’s three ethnic groups has stymied most attempts at political unity, as Nicholl well knows. “As it stands now, we’re halfway through the six-year transition period,” he says. “I’m trying to make sure that all my vice governors have sufficient experience before they take over. That’s as much as I can do.”
As Bosnia’s financial sector slowly improves, Nicholl has begun to dismember the country’s cumbersome local payments bureaus. A remnant of the former socialist regime, the bureaus act as a clearinghouse for all noncash transactions between banks and businesses. Instead, Nicholl wants to create a national, centralized clearing operation. Some of Bosnia’s banks, too, are beginning to modernize and expand across the country’s deep political divide. The Muslim-Croat-Federation-based Micro Enterprise Bank - partly owned by the European Bank for Reconstruction and Development - has broken new ground by applying for a license to operate in the Serb Republic, and others are likely to follow.
Meanwhile, several foreign banks have set up branches in Bosnia, led by Austria’s Österreichische Volksbanken and Bank Austria. Another Austrian bank, Raiffeisen Zentralbank Österreich, has purchased a majority stake in local Market Banka. Turkish banks are also active participants in the marketplace.
Nicholl can feel proud of his part in Bosnia’s recovery. Whether he can continue to work his magic once the deutsche mark is replaced by the euro remains to be seen. “Confidence is hard to gain and easy to lose anywhere, but particularly in Bosnia,” he says. “It’ll be immediately obvious if people start to lose confidence in the currency. They simply won’t accept it any more.”
