Interview of Governor Radoje Žugić for the daily “Pobjeda”
Reducing expenditures and increasing income - the only solution to curb the deficit and public debt
The CBCG shares the IMF position that fiscal adjustment has to speed, and new spending without prior fiscal sustainability impact analysis should be suppressed. If an arrangement is agreed upon, the expected emphasis will be on structural reforms to heal long-term vulnerabilities and reduce unproductive spending. If these measures have the desired effect and an adequate fiscal balance is established, I believe the reduction of salaries and pensions would not be set as a condition, says Žugić.
Žugić assessed that adopting amendments to the Law on CBCG could threaten its independence and that he was satisfied with what he had achieved in the previous six years while rejecting criticism of the supervision quality and his work as Governor.
The biggest challenges for the Montenegrin economy not only in the next year but in the medium term are curbing the budget deficit and public debt paying off, especially given high interest rates. The only solution is fiscal consolidation, which would entail reducing expenditures and increasing revenues, with accompanying structural reforms, the Governor of the Central Bank (CBCG) Radoje Žugić said in an interview with Pobjeda.
He pointed out that the supreme monetary institution shares the IMF position that fiscal adjustment has to speed and new spending without prior fiscal sustainability impact analysis must be suppressed. Initiatives should be designed to increase budget revenues that could compensate for the adverse effects of previously adopted measures that reduced the budget revenue side, which would contribute to the fiscal space optimisation and public debt reduction - Žugić assessed.
POBJEDA: What is the main conclusion of the recent meetings with the IMF? If an arrangement with that institution is agreed upon, do you believe wages and pensions will inevitably reduce?
ŽUGIĆ: CBCG believes in considering an arrangement with the IMF, especially in a high deficit and facing difficulties securing funds for its financing. Usually, the IMF programme includes a series of measures for domestic policies’ structural and financial adjustment. If an arrangement is agreed upon, we should expect an emphasis on structural reforms to heal long-term vulnerabilities and reduce unproductive spending. If these measures prove effective and we establish an adequate fiscal balance, I believe the wages and pensions reduction would not be set as a condition.
POBJEDA: The year 2022 is behind us, and so is your six-year mandate. Are you satisfied with this year’s results and your achievements during the mandate?
ŽUGIĆ: Despite the challenges in the previous six-year period, during which I held the position of Governor, I am highly satisfied with the CBCG work results. At the same time, I am honoured to have had the opportunity to lead such a strong and reputable institution and work with high-quality, professional and dedicated colleagues.
Owing to the supervisor and commercial banks’ joint efforts, the banking sector is today’s healthiest part of the Montenegrin economy. It is confirmed by bank performance indicators, some of which have recorded the most favourable historical values. In the first eleven months of this year, key balance sheet positions grew year-on-year: assets by 17.5 percent, capital by five percent, loans by six percent, and deposits by 21.2 percent. The international institutions’ reports assessed the banking sector of Montenegro as stable, resilient and adequately capitalised.
POBJEDA: How does the fact that your mandate expired more than two months ago affect the CBCG work? When do you expect the Parliament to discuss the President’s proposal to grant you a new mandate as Governor?
ŽUGIĆ: The fact that my mandate has recently expired has not changed my attitude towards the entrusted work, and I perform it in full capacity, as prescribed by law.
POBJEDA: There was a lot of speculation in the public about whether you have the right to a third mandate. Please clarify your position on this issue.
ŽUGIĆ: There are no legal obstacles to being appointed as Governor again. The Central Bank of Montenegro Law provides that the Governor “can be appointed for a maximum of two consecutive terms”. Remember that I held the position of adviser to the Prime Minister of Montenegro before this mandate.
POBJEDA: How could adopting the proposed amendments to the Central Bank of Montenegro Law, which remove the double veto in the Governor’s election, affect the supreme monetary institution’s independence and stability?
ŽUGIĆ: The existing legal solution of appointing the Governor by the Parliament on the President of the State’s proposal enables a transparent institutional division of power. This procedure for electing governors is in line with international best practice, as recently stated by the head of the IMF Mission in Montenegro. Changing this solution could threaten the CBCG’s independence, which is crucial for the financial system’s credibility and stability.
POBJEDA: What is your position concerning affairs and bad business decisions attributed to you?
ŽUGIĆ: For reasons known to them, some individuals and the media use untruths to discredit the excellent work of the CBCG and me as Governor. In contrast to the individuals’ flat and malicious evaluations, solid and irrefutable arguments speak about our work. Here I refer to the exceptionally positive indicators of the banks’ operations and the affirmative assessments of independent international institutions - the European Commission, the European Central Bank, the IMF, etc. The latest IMF report pointed out that “the financial sector remained largely resistant to the disruptions caused by the pandemic with strong capital and liquidity buffers at the system level”.
This assessment and the results of the banks’ Asset Quality Review (AQR), which confirmed the domestic banking sector’s stability, adequate capital position, and satisfactory asset quality, affirmed my work and that of the institution I head.
POBJEDA: How do you respond to the criticism that the quality of CBCG’s supervision is questionable and that proof of failure is you not discovering multimillion-dollar fraud at CKB, but the bank’s internal control did?
ŽUGIĆ: I am not aware of any criticism of the supervision work that came from any relevant domestic or international address. I believe the supervision works extremely high quality and has contributed to the achieved results to a large extent.
The CBCG supervision, whose capacities have significantly improved over the past years, successfully implemented the procedures for introducing a temporary administration in two banks whose operations were not sustainable. Supervision was also responsible for preparing and implementing the innovative regulatory framework, including the new Law on Credit Institutions and more than 20 implementing legislation. For the first time, supervision coordinated and carried out the aforementioned AQR process of all banks in Montenegro, which was extremely demanding, especially in the conditions of the pandemic and the parallel process of bank mergers. The supervision had a special challenge working during the pandemic in designing, undertaking and implementing adequate and timely measures to mitigate the adverse effects on the population, the economy and the banks themselves. Assessments that the CBCG did not detect the multimillion-dollar fraud in CKB Bank result from ignorance of the bank supervision work essence. Namely, through its supervisory function, the CBCG assesses the bank’s compliance with regulations, its exposure to risks and the adequacy of the established risk management system, all to ensure that the bank has capital corresponding to its risk profile. Inter alia, the supervision assesses whether the bank has established an adequate internal control system. The supervision over CKB disclosed that the mentioned frauds, to the greatest extent, resulted from the non- or inadequate implementation of set internal controls, which could not be observed through the reports subject to the inspection.
It is important to note that the fraud did not affect the CKB Bank’s capital position, which remained completely intact, ensuring the business’s stability and that any established damage caused to clients was compensated.
Interest rates record a slight rise
POBJEDA: What interest rate trends do you expect in 2023? Is the fear of increasingly expensive borrowing by citizens and businesses justified?
ŽUGIĆ: The global economic situation is characterised by many risks impacting the formation of interest rates. The war in Ukraine and the general increase in geopolitical tensions, which cause an adverse macroeconomic environment, inflation and threatened supply chains, and an interest rates increase by the leading central banks affect the growth of the cost of capital on the international market, which spills over into the domestic economy.
Bearing this in mind, I expect a mild and moderate increase in interest rates during 2023, which, I expect, will not threaten the financial stability and sustainability of the banking sector and individual clients.
The banking system is resilient and stable
POBJEDA: During this year’s examinations, did you notice any vulnerability in domestic banks? If so, what did it include?
ŽUGIĆ: The Montenegrin banking system is resilient and stable, characterised by high liquidity and adequate capitalisation. Moreover, the banks continued providing the necessary prerequisites for further growth of the domestic economy.
The current challenge facing our economy, and thus the banks, are the direct and indirect consequences of the war in Ukraine. In conjunction with other factors, this conflict strongly influenced the price corrections of a significant number of securities on international markets. This correction was reflected in the market values of securities in our banks’ portfolios, which had a negative impact on the capital of those securities’ holders. Adequate and timely measures of the CBCG and the banks’ activities amortised this negative impact.
At the end of November 2022, the banks’ aggregate capital amounts to 651 million euros. Compared to the end-2021, it increased by 7.56 percent, while the capital adequacy ratio is 18.43 percent, significantly above the statutory minimum.