Outstanding Contribution to Capacity Building: Peter Nicholl

One day in the late 1990s, an International Monetary Fund official walked into the Washington office of his colleague Peter Nicholl. The official asked Nicholl if he would like to be a central bank governor. Nicholl had come to IMF after a distinguished career at the Reserve Bank of New Zealand (RBNZ), where he last served as Deputy Governor. He said he was certainly interested: “And then [the IMF official] said: ‘This is Bosnia.’ And I said, ‘Ahh…maybe I should think about that.'”

Between 1992 and 1995, ethnic conflict in Bosnia killed around 100,000 people. In December 1995, the belligerents signed the Dayton Accords, under strong pressure from the we. The agreement established protocols to rebuild the broken country, including the creation of a central bank. They specified that, for the first six years, the governor of the central bank must be a foreigner, appointed by the IMF.

Several fund officials, including economist Warren Coats, began looking for a governor. “Name [Nicholl] in Bosnia and Herzegovina seemed ready to go,” says Coats central bank. Nicholl’s previous career had been chairing the task force that advised the New Zealand government on granting RBNZ operational independence from monetary policy. Nicholl agreed to take the job.

Bank of Bosnia and Herzegovina” title=”Central Bank of Bosnia and Herzegovina” typeof=”foaf:Image”/>

Central Bank of Bosnia and Herzegovina

He arrived in Sarajevo in October 1997, accompanied by his wife Glynyss, who helped him carry out an urgent audit of the new central bank. Bosnia, which then had about 4 million inhabitants, used four currencies: the Serbian dinar, the Bosnian dinar, the Croatian kuna and the deutschmark. The new central bank had little capital and almost no revenue. This made it difficult to manage the strict currency board specified by the Dayton Accords.

Early on, the Central Bank of Bosnia and Herzegovina broke currency board rules, prompting a private threat of action from the IMF. Nicholl demanded that the fund provide CBBH with the DM25 millions of capital he had promised. the CBBHhe said, got that plus a supplement DM4 million. Nicholl was able to negotiate repayment of a shortfall of central bank funds left behind by the wartime Bosnian government.

Bosnia had 76 banks, the result of a free-for-all license during the conflict, and their total deposits were low. the CBBH encouraged foreign banks to open Bosnian branches. With the recovery of the banking sector, the CBBH was able to grow its balance sheet.

Inflation was in double digits at the start of Nicholl’s term and was extremely high in many neighboring countries. The central bank lacked many monetary policy tools available to its peers. But Nicholl found that controlling credit growth by increasing bank reserve levels was an effective way to reduce inflation.

Nomination [Nicholl] in Bosnia and Herzegovina seemed all done…I think he was really quite ideal for the job as he had everyone’s respect in terms of skill and fairness

Warren Coats

He used his influence with donors to protect Bosnia’s chief banking supervisor, a local official whose cleanup had made him enemies among the country’s politicians. Back then, companies processed large transactions through a cumbersome legacy system of “payment desks”. the CBBH led the complex operation to replace it with a modern payment system.

Nicholl increased his staff to around 200, opening offices in other parts of Bosnia. He worked to create a culture of openness and decentralized decision-making. Nicholl also introduced many of the internal structures and processes he had learned in the RBNZ in the CBBH. These included management and investment committees, a formal budgeting process and strategic planning, which are still in place in the CBBH today. He began by giving the three vice-governors, one from each community, a spell taking over the management of the CBBH. “I think he was really ideal for the job because he had everyone’s respect in terms of skill and fairness,” Coats says.

the CBBH The law also required the central bank to introduce a new currency, the convertible mark. But Bosnian politicians were in bitter disagreement over the name of the currency and the symbols that would appear on the banknotes. Nicholl reviewed the rival proposals to see what the three groups could agree on. “In the end, they just quietly accepted it,” says Coats. “That was quite an achievement on Peter’s part.”

When the euro replaced the deutschmark, the CBBH persuaded Bosnians to convert their German marks into convertible marks and deposit cash in banks. The latter was no trivial task, as Bosnians had previously been wary of local banks and frequently held cash at home. But new confidence in the banking system meant deposits were growing rapidly, more than doubling the amount of foreign exchange reserves over a three-month period. the CBBH also led an effort to publish accurate information GDP figures for Bosnia, using Italian expertise to take into account the contribution of the ‘grey economy‘.

From left to right: Peter Nicholl and Kemal Kozarić

From left to right: Peter Nicholl and Kemal Kozarić

As Nicholl’s six-year term drew to a close, the leaders of Bosnia’s three communities were initially unable to agree on a successor. The three political leaders, one from each community, who were the co-presidents of Bosnia, asked him to stay another 18 months, which he accepted, on the condition that they decide on a new governor. They were able to decide that Vice Governor Kemal Kozarić should have the role. Nicholl left the position in 2004 after seven and a half years, remaining on the board for an additional year to help with the transition.

the CBBH started out underfunded, understaffed, in a divided country. In its early years, it drastically reduced inflation, helped rebuild the banking sector, and introduced a new currency and payment system. The central bank has assembled its own staff of dedicated officials.

Perhaps more importantly, it became an institution that was trusted across divides.

“It’s happened probably 20 or 30 times that I walk down the street or [sitting] in a restaurant and someone I didn’t know came up to me and thanked me for offering them low inflation and a stable exchange rate,” says Nicholl.

He laughs: “It never happened to me in New Zealand.”

Nicholl himself praises the contributions of Bosnian staff and international experts who helped him during his time as governor. But his leadership was crucial to the central bank’s success in deeply unpromising circumstances and represented an outstanding contribution to capacity building.

The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Victor Mendez-Barreira, Ben Margulies and Riley Steward

About Eleanor Blackburn

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