The National Bank of Serbia (NBS) announced today that by proactive action and responsible behavior for the last eight years, it has successfully maintained the relative stability of the exchange rate, which is one of the main pillars of the country’s monetary, financial and macroeconomic stability.
As it is pointed out, this approach to maintaining the relative stability of the exchange rate is in line with inflation targeting as the basic monetary strategy, and its justification is confirmed by recent works and research by renowned institutions such as the Bank for International Settlements (BIS) and the International Monetary Fund.
In periods of prevailing pressure to strengthen the dinar, acting proactively, the NBS bought foreign exchange, thus increasing foreign exchange reserves and creating a sound basis for preserving the country’s external position in conditions of turbulence at the global level. By doing so, from April 2017 to the end of 2019, the NBS bought over 5.3 billion euros in net amount, thus strengthening the resilience of the domestic financial system to shocks from the international environment.
In conditions that create pressures towards the weakening of the domestic currency, such as the current uncertainty in the international context due to the global pandemic, the NBS uses previously and increased foreign exchange reserves in a measured and cautious manner. As it is pointed out, the NBS appears on the foreign exchange market as a net seller of foreign exchange.
This approach to maintaining the relative stability of the exchange rate is in line with inflation targeting as the basic monetary strategy, as evidenced by the results recorded in terms of maintaining low inflation.
The justification of the approach implemented by the National Bank of Serbia, which takes into account all the specifics of the domestic economy and environment, is increasingly being confirmed in economic theory.
The latest example of such confirmation is the expert economic analysis of the BIS, which deals with the effects of weakening (depreciation) of the domestic currency in conditions of a high degree of indebtedness of the domestic economy in foreign currency.
Namely, according to the results of the analysis, “depreciation can lead to significant negative effects on the balance sheet of the company and to reduced investment activity.”
A recent IMF analysis also confirms that the benefits of the depreciation of the domestic currency – limited and short-term, especially in the case of developing countries – show only a slight reaction of export volumes to the weakening of the domestic currency in the short term. And we could feel the negative consequences of the significant weakening of the currency on the financial stability of Serbia in the period before 2012, and we will not allow them to happen again, according to the NBS.
New findings of economic theory, such as the above, confirm the justification of the approach of the NBS of Serbia in preserving the relative stability of the exchange rate, and strengthen the determination to continue with the application of such an approach in the future, the central bank said in a statement, Danas reports.
