Financial Stability Report No1 20 December 2010 - Banka Qendrore ...

Number 1Financial Stability ReportAll six SEE countries are small and open economies which have introduced differentmonetary and exchange rate policies in the order to achieve macroeconomic stabilization.Bulgaria opted for currency board while Macedonia introduced tightly managed floatingexchange rate regime similar to the one Slovenia introduced in the 90’s. Albania and Serbiaare the followers of the inflation targeting which implicitly presupposes free floating of thedomestic currency. Nonetheless, one can observe rather systematic central bankintervention in both countries respectively. The tiniest of the SEE countries, Montenegroand Kosovo chose unilateral adoption of EURO due to their unfavourable conditions at thetime of declaring their independent political and sovereign states.Despite differences in official monetary regimes in the SEE countries, all of them haveexperienced similar price developments in the last ten years. The most volatile pricedevelopment was observed in Serbia although all countries were able to curb their inflationrates below 5 %s which qualifies their macroeconomic environment as relatively stable. It israther instructive to say that despite differences in monetary regimes all countries in theregion have faces very similar if not almost identical price developments in their economies.Confusion about the most appropriate monetary or exchange rate regime which was solegitimate twenty years ago has lost its strength during the course of transition in othermore developed transition economies. It seems that the choice of the monetary or exchangerate regime was rather arbitrary and prone to particular circumstances at the time of thetransitional process in those economies. Trade openness and substantial presence of foreignowned institutions in the financial sector limits the operational scope of different monetaryor exchange rate regimes and reduce them to follow the autonomous flows of trade andcapital into and out of these economies. Corner solutions in design of the monetary orexchange rate policies are therefore adjusted to the point that one can hardly differentiateamong different regimes proving the tendency of the central bank to be rather discretionaryin conduct of monetary policy (Reinhart and Calvo, 2002).Table 11. The structure of exports and imports in selected countries, in percentKosovo Macedonia Albania Bulgaria Serbia MontenegroMostly exports: Mostly exports: Mostly exports: Mostly exports: Mostly exports: Mostly exports:Base metals (50%) Iron&Steel (26%) Textiles (35%) Non-ferrous metals (37%) Manufactured goods (33%) Aluminium (41%)Mineral products (15%) Clothing (20%) Minerals (30%) Clothing (36%) Food (16%) Iron and steel (13%)Vegetables (6%) Food&Beverages (14%)Construction mat. & MetalsBeverages, alcohol, vinegarEnergy resources (5%) Machinery (15%)(19%)(6%)Mostly imports: Mostly imports: Mostly imports: Mostly imports: Mostly imports: Mostly imports:Mineral products (17%)Machinery&Trasnports equip.(24%)Machinery (20%) Machines&Tools (43%) Machinery (25%)Machines&Mech.Equipments(12%)Machinery (14%) Mineral fuels (16%) Food&Beverages (18%) Food (32%) Manufactured goods (20%) Mineral fuels (8%)Food&Beverages (13%) Food (11%) Construction mat.&Metals (15%) Textiles (27%) Mineral fuels (18%) Iron and steel products(5%)Source: Central banks of the respective countriesThe cases of Montenegro and Kosovo strengthen that argument even further bydeliberately surrendering the option of quasi-independent monetary policy and opting tounilateral adoption of EURO. Without their own monetary policies price developments inthose countries are closely mimicking inflation rates in their neighbouring countries.As it will be shown below in each country presentation, some SEE countries evenexperienced deflation in last few years. Substantial part in explaining the price62 |