They call it the Berlin Wall of the digital economy and the main barrier to even faster development and greater investments in the Serbian IT industry. They say it has not withstood the test of time, meaning its framework dates back to the times of the former Yugoslavia, although the business has changed its forms several times since then. They argue that it hampers the competitiveness of an already insufficiently competitive domestic economy, often driving investors to other destinations, and also prevents domestic businesses from investing abroad.
If the intention of the National Bank and the legislator is to make it more difficult for foreign currency outflows from Serbia, maintaining the regulations in their current form evidently will not contribute to that goal. The economy has progressed so much, driven by a technological boom, and the channels of outflow are changing so rapidly that even much more efficient control mechanisms struggle to stop those who are determined to move the money earned in Serbia to a safer or more acceptable destination.
Why does the business community complain so much about the Foreign Exchange Law, and why is the National Bank of Serbia so determined to preserve the regulation in its current form?
More obstacles than support
“This regulation imposes significant limitations on the operations of the economy, especially in the digital economy domain. The key criticism relates to the positivistic interpretation of this law, which creates challenges in practice. The law is accompanied by numerous sub-legislative acts and is interpreted on the principle that anything not explicitly permitted is prohibited by law. This approach means that potentially innovative solutions or new models of international business are difficult to implement in practice,” says Dejan Vuković, a lawyer and partner at the law firm Vuković and Partners, in an interview with Forbes Serbia.
He explains that the existing regulation is not aligned with the changes brought by the digital economy, specifically the IT sector as one of the main contributors to exports in Serbia.
“There are more obstacles than support. For many reasons, it represents a barrier to accessing funding sources and complicates the realization of income from abroad, which is why the term ‘Berlin Wall of the digital ecosystem’ is widely accepted as a synonym for the Foreign Exchange Law,” says Vuković.
Critiques of the provisions of the Foreign Exchange Law have been an integral part of recommendations from business associations for years, including NALED’s Grey Book and the Foreign Investors Council’s White Book.
In their recommendations, the Foreign Investors Council advises “softening the positivistic way of defining provisions in the Foreign Exchange Law and continuing to ease administrative requirements, with a particular emphasis on transitioning to subsequent reporting on cross-border loans.”
The National Bank of Serbia is exceeding its powers
“Based on the authority granted by the Foreign Exchange Law, the National Bank of Serbia has adopted a Decision on Reporting on Credit Transactions with Foreign Countries, as well as instructions on completing the relevant forms. In practice, it has been observed that such reporting results in exceeding the authorized powers and insufficiently transparent actions by the National Bank of Serbia… In accordance with the Law and relevant sub-legislative acts, registration is a necessary precondition for conducting payment transactions on credit debt.
During the registration of credit debt, the National Bank of Serbia does not limit itself to collecting data necessary for statistical purposes but delves into the content of the contract itself, including, in particular, assessing the agreed interest rate,” states NALED’s Grey Book for the year 2023. They argue that the National Bank of Serbia does not have the authority to verify the content of contracts and assess whether an interest rate is too high or not, which it does in practice. This creates legal uncertainty and gives the central bank the space to arbitrarily decide, on a case-by-case basis, which interest rate is appropriate and which is not.
“This is contrary to the rule of law principle since the National Bank of Serbia essentially decides on the rights of companies without proper authorization and without making a formal decision,” states the document, along with a recommendation for the National Bank of Serbia to cease such informal practices.
Dejan Vuković also addressed this issue.
“The law and sub-legislative acts require domestic companies to submit various reports to the National Bank of Serbia before commencing planned business activities with foreign countries. Although this obligation, according to Article 37 of the Law, is generally conceived as a statistical function that should not burden the economy, in practice, it becomes a significant administrative burden. The large amount of documentation and the fact that this is a prerequisite for using funds from abroad make this obligation excessive,” explains our interlocutor, emphasizing that there are suggestions to simplify this procedure, i.e., to transform it from a prior to a subsequent requirement.
“When someone receives an inflow, they should then inform the NBS within a prescribed period,” says Vuković.
“The law affects many parts of the economy, but the most affected is the innovative segment, i.e., companies dealing with innovative technologies. For them, stable, and above all, efficient international transactions are crucial. They are, by their nature, highly mobile, so it is not inconceivable that without significant costs and with little effort, they can leave our market in favor of a more competitive one, potentially leaving Serbia without investments and significant budget revenues. Therefore, it is necessary to enable more efficient and faster international transactions,” explains Vuković.
It’s not the Berlin Wall but a shield against instability
In the National Bank of Serbia, considered the strongest defense of this regulation, they tell Forbes Serbia that it is one of the most important or systemic laws aimed at ensuring Serbia’s macroeconomic and financial stability. While the business community sees it as the Berlin Wall preventing it from operating faster, better, and more competitively, the NBS refers to the same regulation as “a wall preventing the spillover of negative effects of unstable financial flows from the international environment to the domestic economy.”
So, the NBS does not acknowledge that the Foreign Exchange Law is such a barrier to business operations; instead, they state that there is already a “significant degree of liberalization of cross-border transactions,” and most of them are “already conducted without specific restrictions, with the obligation to report to the NBS on the basis of the transaction, solely for the purposes of foreign exchange statistics and the preparation of the country’s balance of payments. The data collected in this process forms the basis for compiling balance of payments statistics, external debt statistics, and international investment position statistics, about which the National Bank of Serbia regularly reports to the IMF and Eurostat in line with the country’s internationally assumed obligations,” according to the NBS statement to Forbes Serbia.
In other words, the NBS does not admit to informally exceeding its powers granted by this regulation. “There is a possibility that the statement that the Foreign Exchange Law slows down investments in startups is the result of a misunderstanding of the application of this law, and the National Bank of Serbia is available for any additional dialogue and discussion to resolve any potential doubts in this regard,” says the NBS.
Zoran Petrović, CEO of Raiffeisen Bank, is convinced that the biggest problem is that the mentioned regulation is outdated, and its foundation “comes” from the old times of the former Yugoslavia, which had numerous problems with repaying foreign debt, thin foreign exchange reserves, and, accordingly, the need to control and limit current and capital transactions with foreign countries.
“All of this is out of fear that the economy and citizens will take their money abroad, and the country will be left without foreign exchange. Today, times have changed. Anti-money laundering regulations are strict both here and worldwide. Our foreign exchange reserves are at a high level. If you look at the provisions of that law today, you will see that there are provisions dating back to 1985. That’s why business associations believe that this law jeopardizes the efficiency of operations, competitiveness, limits the work of our companies abroad, and, with its rigid provisions, negatively affects the development of the digital economy,” says this source.
We are not an obstacle to new sources of financing
“Foreign exchange regulations do not hinder economic activities, development, or access to new sources of financing. On the contrary, they aim to preserve a favorable business environment for the successful implementation of future investment projects,” claims the NBS, emphasizing that “in line with Serbia’s strategic commitment, especially in conditions of increased uncertainty due to pronounced geopolitical tensions and heightened global financial conditions, the NBS continues with a measured and gradual approach to further liberalizing capital flows,” as it does not want to negatively impact macroeconomic stability and the financial system.
Dejan Vuković understands the need for the NBS to preserve the country’s monetary and macroeconomic stability, meaning it wants to control or at least supervise the inflow and outflow of money and capital for that reason.
“This approach is not necessarily bad, especially in crisis situations. However, from the perspective of an average entrepreneur, it is unjustified because their position is made more difficult compared to their colleagues and associates in less restrictive jurisdictions,” warns Vuković.
He says there is plenty of room for improving the law, whether it involves amending the existing regulations or adopting a new Foreign Exchange Law with provisions more suited to modern business practices.
“We must not forget that, in this specific case, the problem lies not only in the law but, as can be seen from the previously outlined practical challenges, in numerous sub-legal acts, more than 30 of them, as well as in the interpretation by the NBS of certain provisions,” believes Vuković.
The interviewee with Forbes Serbia further states that the provisions of the regulations must be adjusted so that all forms of business that are not explicitly prohibited are allowed, to reduce administration, increase the volume of electronic document submission, and similar provisions already exist in neighboring countries such as Croatia, Montenegro, or Bulgaria.
On the other hand, the NBS claims that the achieved level of liberalization is in line with Serbia’s obligations to the EU, and full liberalization will occur when Serbia becomes a full member.
Everything remains just promises
“We emphasize that the existing reporting process on credit transactions with foreign countries is aligned with the international methodology prescribed by the IMF and the European Union. In addition, the reporting process is aligned with the regulations of the European Union, which prescribe far more detailed reporting on credit transactions compared to reporting in Serbia. After the 2008 crisis, the European Central Bank, within the initiatives AnaCredit and RIAD, prescribed the obligation to report on each individual credit transaction with data on about 90 criteria, which include not only data on debtors and creditors but also data on their majority and ultimate owners, as well as data on the ultimate owners of collateral,” stated the National Bank.
In the end, both sides state that they are ready for a compromise solution, but it has not yet been reached.
“We carefully analyze all initiatives that come from the economy, and we will continue to take measures that enable more efficient involvement of the domestic economy in international flows,” says the National Bank.
“Both interests, of the National Bank and the economy, are legitimate and necessarily do not exclude each other. However, finding a middle ground to reduce the burdens on the economy while maintaining a satisfactory level of macroeconomic stability is obviously a significant challenge for both the National Bank and the legislator,” concludes Dejan Vuković.
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