Current Issues from the Scope of Competences of the National Bank of Serbia Radovan Jelašić – Governor Belgrade, March 31, 2006

Although March inflation amounted to only 0.3%, which means that Serbia is on the right track to accomplish single-digit inflation... March inflation relative to the same month in 2005 declined to 14.4% - (December 2006 to December 2005 was at the level of 17.7%!) First-quarter inflation: 2.2%; In the first 2 months, lending activity* gained CSD 28.6 billion, net: legal entities + CSD 18.0 billion (stock: CSD billion); natural persons + CSD 10.6 billion (stock: CSD billion); The sum of sterilization rose by a total of CSD 34.4 billion from January 1 to date, as follows: + CSD 14.2 billion through repo transactions (stock: CSD 31.0 billion); + CSD 20.2 billion through reserve requirement (stock: CSD billion). * Preliminary data ending February 28, 2006.

... there are no reasons for relaxation; on the contrary, through its measures the NBS seeks to anticipate the challenges expected in the second quarter of this year Electricity price hike of 11.7% on average will contribute approximately 0.8% to April inflation*; The Government continues to use “higher than planned privatization proceeds recorded in 2005” in order to finance certain projects in 2006; In April and May, prices of fresh fruit and vegetables record seasonal growth; Frozen foreign exchange savings are due to be paid on May 31; Banks’ lending activity is also higher in the second quarter. Monetary policy measures have a delayed effect! * Based on calculations of the Republic Statistical Office, from the document of the RS Government regarding electricity price changes.

New NBS measures effective as of April 10 ought to dampen inflationary pressures Reserve requirement ratio on foreign exchange deposits and dinar deposits with a foreign currency clause raised from 38% to 40%; Reserve requirement ratio of 20%, half the reserve requirement on foreign exchange deposits, on borrowing in respect of subordinated capital introduced; Reserve requirement ratio on deposits for leasing companies raised from 10% to 20%, i.e. half the reserve requirement ratio on foreign exchange deposits; banks required to calculate 100% reserve requirement in respect of these funds Current interest rates on repo operations retained, in order to maintain the present level of sterilization. Effects: CSD 9.3 billion CSD 3 billion CSD 1.4 billion TOTAL: CSD ~13.7 billion

Depending on the inflation rate in April, the NBS will be ready to take additional measures Interest rate on repo operations; Reserve requirement; Issue of new dinar savings bills; Supervisory function – supervision of banks, as well as leasing and insurance companies;

All “specious” criticisms aimed at the NBS are entirely unwarranted, as we are aware of all existing problems more than anyone else (1/2) Central banks run monetary policy only and have no other instruments at their disposal, whereas criticisms such as: “more should be saved in the fiscal sector, and restructuring should be accelerated” are something that the NBS itself continues to say to budget beneficiaries; No one has ever managed to suppress inflation by means of cheaper money – from a purely professional point of view, people who advocate this should not be criticized, but simply pitied! (From June 2004 until March 28, 2006, in its six-weekly meetings the American Federal Reserve raised the interest rate 15 times by 0.25% each – from 1% to as much as 4.75%); If politicians believe that there are more important things than price stability that should replace the latter as the primary objective of the NBS, they should simply amend the Law on the NBS! So far, the NBS has not intended to prohibit credit growth, nor will it do so in the future; it aims exclusively at slowing down the pace of credit expansion!

“Unpopular measures reduce the price of banks in Serbia” – this is an untrue statement, as practice shows that the exact opposite is true: banks in Serbia have never been appreciated more highly than today! “It is not profitable for banks/leasing companies to make additional investments in Serbia as the reserve requirement is so high” – this is again untrue: during the year 2005, banks/leasing companies drew 35%/48% more credits from abroad than in 2004; The NBS “arbitrarily raises the reserve requirement in order to swell its own revenues” – this is a completely senseless proposition, and it can only be put forward by those who are not familiar with the role of central banks; There are many more examples... All “specious” criticisms aimed at the NBS are entirely unwarranted, as we are aware of all existing problems more than anyone else (2/2)

Implementation of structural reforms remains the key challenge, and there is no alternative to fiscal consolidation In the absence of an IMF program, topics such as NIS and EPS restructuring, and the sale of already spun-off non-core assets from large public enterprises, seem to have been removed from the agenda of economic reforms; The economic policy for the year 2006, apart from the section that forms part of the IMF program, contains no other concrete company names, nor any reference to dates/deadlines! The Government should be more proactive and transparent, and not wait for a new IMF program! The Government has made commitment to the IMF: * “In 2006, budgetary revenues in excess of the revised projection (SRD 495 billion for the republican budget) will be saved”; The budget does not foresee any “additional investments” in 2006 other than those contained in the budget – each additional dinar that the Government places in the system from excess privatization receipts will generate INFLATION if the NBS does not withdraw it. Withdrawal does not only entail cost for the NBS/government, but also higher interests for borrowers! * Excerpt from Memorandum on Economic and Financial Policies, January 2006.

The dinar is certainly floating – foreign exchange reserves have never been higher (1/2) NBS Foreign Exchange Reserves (EUR mln) * Прелиминарни подаци Foreign exchange reserves have reached the level of USD 6.4 billion, and are likely to grow still further; Foreign exchange reserves over М1 ratio stands at 325%. Private borrowing is on a quick rise; A part of new debt are credits within the same group of enterprises! Jun 05Sept 05Dec 05Jan 06Feb 06Mar January06February06March06* Inflow of Funds from Abroad (EUR mln) FDI New credits

The dinar is certainly floating – foreign exchange reserves have never been higher (2/2) Прилив средстава из иностранства ЦСД/ЕУР CSD/EUR Exchange Rate and NBS Interventions from February 1 to Date ЕУР млн From February 1 to date, the NBS sold only EUR million, i.e. about EUR 4 million daily; Substantial foreign exchange inflow places appreciation pressure on the dinar; Banks’ exchange rate shows much greater upward (strengthening of the euro) than downward (strengthening of the dinar) flexibility! Commercial Banks’ CSD/EUR Exchange Rate Movements Relative to NBS Median Exchange Rate/ MonTueWedThuFriMonTueWedThu Banks’ average selling exchange rate NBS median exchange rate Banks’ average buying exchange rate CSD/EUREUR mln

December 26, 2005 NBS savings bills have been proven to be the optimal investment! CSD 100,000 (= EUR 1,165 CSD 106,450 EUR 1,226 p.a. yield 25% Person that trusted bankers and saved in euros Person that trusted the NBS and saved in dinars NBS is not a profit-making organization NBS does not have millions for advertising Citizens are at liberty to choose who to trust And whereas bankers advise their clients to opt for foreign exchange savings, these same bankers are the largest buyers of savings bills EUR 1,165 !  EUR 1, %) 5% March 31, 2006

Today, the NBS revoked the operating license of MB banka from Nis, for the following reasons: The bank was significantly undercapitalized and even after a full year it failed to have capital increase effected a. by existing shareholders or b. by a new shareholder acceptable for the NBS In addition to that, the bank also violated a large number of other laws and regulations related to banking supervision, such as: Acquisition of shares with controlling right - 15% in the share capital; Largest permissible loan ratio – 25% of capital; Largest permissible loan ratio in respect of related parties – 5% capital; Majority of reports submitted to the NBS did not contain correct data; Inadequate internal audit; Claim lodged by former shareholders of Kapital banka. Claim lodged by MB banka in respect of the decision of the Commercial Court related to the acquisition of Kapital banka in bankruptcy; The NBS reacted timely – liquidation, not bankruptcy, is most likely; there will be no obligations in respect of deposit insurance at the expense of the Government. Natural persons’ deposits have already been paid out subject to a previous order of the NBS. The high level of current liquidity ought to guarantee that claims of depositors – legal entities will for the most part be settled in the process of liquidation as well!

Relations with the IMF Meeting with top IMF and World Bank representatives during the annual meeting in Washington on April 21-24; Towards the end of May, IMF mission is expected to arrive with relation to Article IV of the IMF Articles of Agreement concerning the macroeconomic situation, together with the first review within post-program monitoring; The following obligations need to be performed as part of the IMF program that relates to 2006: Consolidated general government budget surplus of 2.5% of GDP, with a cut in overall public expenditures by at least 1% of GDP; Limitation of wage bill growth in public enterprises to 10.3%, and limitation of wage bill growth on the local level to 9%; Continuation of the process of banks’ privatization (privatization of Vojvodjanska banka); Launching an international tender for the privatization of two refineries; Rationalization of employment in public enterprises EPS and ZTP, and spin-off of non-core assets in ZTP; All companies in Privatization Agency’s portfolio to be offered for sale at least once until the end of “The role of the IMF is not to impose reforms, but to support the Government which has not only vision but also strategy for reform implementation!”